The risks in CDO-squared structures

Andrew Adams, R. Bhatt, J Clunie

    Research output: Contribution to journalArticle

    Abstract

    The recent sub-prime debacle has brought ‘innovative’ structured credit products such as collateralized debt obligations under severe criticism. The complexity of some structured finance securities and difficulties in understanding their risks has been a common theme. This paper argues that CDO-squared structures can be so complex as to make risk assessment difficult. By modeling a simplified CDO-squared structure using Monte Carlo simulation, two of the risks unique to such structures are examined: default location risk and overlap risk. Failure to take account of these risks during a distressed credit environment will result in greater than anticipated losses among senior CDO-squared tranches.
    Original languageEnglish
    Pages (from-to)55-74
    Number of pages20
    JournalMultinational Finance Journal
    Volume13
    Issue number1/2
    Publication statusPublished - 2009

    Keywords

    • collateralized debt obligation
    • CDO-squared
    • default location risk
    • overlap risk
    • Monte Carlo simulation

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  • Cite this

    Adams, A., Bhatt, R., & Clunie, J. (2009). The risks in CDO-squared structures. Multinational Finance Journal, 13(1/2), 55-74.