Default risk sharing between banks and markets : the contribution of collateralized debt obligations
- This paper contributes to the economics of financial institutions risk management by exploring how loan securitization a.ects their default risk, their systematic risk, and their stock prices. In a typical CDO transaction a bank retains through a first loss piece a very high proportion of the expected default losses, and transfers only the extreme losses to other market participants. The size of the first loss piece is largely driven by the average default probability of the securitized assets. If the bank sells loans in a true sale transaction, it may use the proceeds to to expand its loan business, thereby incurring more systematic risk. We find an increase of the banks' betas, but no significant stock price e.ect around the announcement of a CDO issue. Our results suggest a role for supervisory requirements in stabilizing the financial system, related to transparency of tranche allocation, and to regulatory treatment of senior tranches. JEL Klassifikation: D82, G21, D74 .
Author: | Günter FrankeGND, Jan Pieter KrahnenORCiDGND |
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URN: | urn:nbn:de:hebis:30-10832 |
Parent Title (German): | Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2005,06 |
Series (Serial Number): | CFS working paper series (2005, 06) |
Document Type: | Working Paper |
Language: | English |
Year of Completion: | 2005 |
Year of first Publication: | 2005 |
Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
Release Date: | 2005/06/13 |
GND Keyword: | Kreditmarkt; Kreditsicherung; Risikomanagement; Collateralized debt obligation |
Issue: | February 15, 2005 |
HeBIS-PPN: | 197153348 |
Institutes: | Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) |
Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
Licence (German): | Deutsches Urheberrecht |