Centres Forfattere "Cont, Rama"
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Modeling and Risk AnalysisCont, Rama; Jessen, Cathrine (, 2011)[Flere oplysninger][Færre oplysninger]
Resume: Constant Proportion Debt Obligations (CPDOs) are structured credit derivatives which generate high coupon payments by dynamically leveraging a position in an underlying portfolio of investment grade index default swaps. CPDO coupons and principal notes received high initial credit ratings from the major rating agencies, based on complex models for the joint transition of ratings and spreads for all names in the underlying portfolio. We propose a parsimonious model for analyzing the performance of CPDO strategies using a topdown approach which captures the essential risk factors of the CPDO. Our approach allows to compute default probabilities, loss distributions and other tail risk measures for the CPDO strategy and analyze the dependence of these risk measures on various parameters describing the risk factors. We nd that the probability of the CPDO defaulting on its coupon payments is found to be small{and thus the credit rating arbitrarily high{ by increasing leverage, but the ratings obtained strongly depend on assumptions on the credit environment (high spread or low spread). More importantly, CPDO loss distributions are found to be bimodal with a wide range of tail risk measures inside a given rating category, suggesting that credit ratings are insu cient performance indicators for such complex leveraged strategies. A worstcase scenario analysis indicates that CPDO strategies have a high exposure to persistent spreadwidening scenarios CPDO ratings are shown to be quite unstable during the lifetime of the strategy. URI: http://hdl.handle.net/10398/8890 Filer i denne post: 1
constant_proportion_cathrine_jessen.pdf (599.2Kb)
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