A Benchmark for Collateralized Loan Obligations-Reference-Cited by-同舟云学术

A Benchmark for Collateralized Loan Obligations

Published:2024-05-21 Issue: Volume: Page:
ISSN:0025-1909
Container-title:Management Science
language:en
Short-container-title:Management Science

Author:

Elkamhi Redouane¹,Li Ruicong²^ORCID,Nozawa Yoshio¹³^ORCID

Affiliation:

1. Rotman School of Management, Toronto, Ontario M5S 3E6, Canada;

2. Department of Finance, Hong Kong University of Science and Technology, Hong Kong SAR;

3. UTSC, Toronto, Ontario M5S 3E6, Canada

Abstract

We build a benchmark for AAA-rated tranches of collateralized loan obligations (CLOs) using business development companies (BDCs), which hold a diversified portfolio of loans as CLOs do. BDCs are publicly listed, and their share price, equity volatility, and borrowing cost can be easily obtained. Applying a structural model to BDCs, we extract market-implied correlation in their loan portfolio, compare spreads on CLO tranches and BDC-implied benchmark, and find that observed large credit spreads on CLO senior tranches after the financial crisis are a fair reflection of the systematic risk of correlated loan defaults. This paper was accepted by Lukas Schmid, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.00097 .

Publisher

Institute for Operations Research and the Management Sciences (INFORMS)

Link

https://pubsonline.informs.org/doi/pdf/10.1287/mnsc.2022.00097

Reference33 articles.

1. On reaching for yield and the coexistence of bubbles and negative bubbles

2. The Illiquidity of Corporate Bonds

3. Reaching for Yield in the Bond Market

4. Explaining asset pricing puzzles associated with the 1987 market crash

5. Measuring Abnormal Bond Performance