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Large banks often sell part of their loan portfolio in the form of collateralized debt obligations (CDO) to investors. In this paper we raise the question whether credit asset securitization affects the cyclicality (or commonality) of bank equity values. The commonality of bank equity values reflects a major component of systemic risks in the banking market, caused by correlated defaults of loans in the banks' loan books. Our simulations take into account the major stylized fact of CDO transactions, the non-proportional nature of risk sharing that goes along with tranching. We provide a theoretical framework for the risk transfer through securitization that builds on a macro risk factor and an idiosyncratic risk factor, allowing an identification of the types of risk that the individual tranche holders bear. This allows conclusions about the risk positions of issuing banks after risk transfer. Building on the strict subordination of tranches, we first evaluate the correlation properties both within and across risk classes. We then determine the effect of securitization on the systematic risk of all tranches, and derive its effect on the issuing bank's equity beta. The simulation results show that under plausible assumptions concerning bank reinvestment behaviour and capital structure choice, the issuing intermediary's systematic risk tends to rise. We discuss the implications of our findings for financial stability supervision. Klassifikation: G28
Risk transfer with CDOs
(2008)
Modern bank management comprises both classical lending business and transfer of asset risk to capital markets through securitization. Sound knowledge of the risks involved in securitization transactions is a prerequisite for solid risk management. This paper aims to resolve a part of the opaqueness surrounding credit-risk allocation to tranches that represent claims of different seniority on a reference portfolio. In particular, this paper analyzes the allocation of credit risk to different tranches of a CDO transaction when the underlying asset returns are driven by a common macro factor and an idiosyncratic component. Junior and senior tranches are found to be nearly orthogonal, motivating a search for the whereabout of systematic risk in CDO transactions. We propose a metric for capturing the allocation of systematic risk to tranches. First, in contrast to a widely-held claim, we show that (extreme) tail risk in standard CDO transactions is held by all tranches. While junior tranches take on all types of systematic risk, senior tranches take on almost no non-tail risk. This is in stark contrast to an untranched bond portfolio of the same rating quality, which on average suffers substantial losses for all realizations of the macro factor. Second, given tranching, a shock to the risk of the underlying asset portfolio (e.g. a rise in asset correlation or in mean portfolio loss) has the strongest impact, in relative terms, on the exposure of senior tranche CDO-investors. Our findings can be used to explain major stylized facts observed in credit markets.
Risk transfer with CDOs
(2008)
Modern bank management comprises both classical lending business and transfer of asset risk to capital markets through securitization. Sound knowledge of the risks involved in securitization transactions is a prerequisite for solid risk management. This paper aims to resolve a part of the opaqueness surrounding credit-risk allocation to tranches that represent claims of different seniority on a reference portfolio. In particular, this paper analyzes the allocation of credit risk to different tranches of a CDO transaction when the underlying asset returns are driven by a common macro factor and an idiosyncratic component. Junior and senior tranches are found to be nearly orthogonal, motivating a search for the where about of systematic risk in CDO transactions. We propose a metric for capturing the allocation of systematic risk to tranches. First, in contrast to a widely-held claim, we show that (extreme) tail risk in standard CDO transactions is held by all tranches. While junior tranches take on all types of systematic risk, senior tranches take on almost no non-tail risk. This is in stark contrast to an untranched bond portfolio of the same rating quality, which on average suffers substantial losses for all realizations of the macro factor. Second, given tranching, a shock to the risk of the underlying asset portfolio (e.g. a rise in asset correlation or in mean portfolio loss) has the strongest impact, in relative terms, on the exposure of senior tranche CDO-investors. Our findings can be used to explain major stylized facts observed in credit markets.
This paper analyzes the risk properties of typical asset-backed securities (ABS), like CDOs or MBS, relying on a model with both macroeconomic and idiosyncratic components. The examined properties include expected loss, loss given default, and macro factor dependencies. Using a two-dimensional loss decomposition as a new metric, the risk properties of individual ABS tranches can directly be compared to those of corporate bonds, within and across rating classes. By applying Monte Carlo Simulation, we find that the risk properties of ABS differ significantly and systematically from those of straight bonds with the same rating. In particular, loss given default, the sensitivities to macroeconomic risk, and model risk differ greatly between instruments. Our findings have implications for understanding the credit crisis and for policy making. On an economic level, our analysis suggests a new explanation for the observed rating inflation in structured finance markets during the pre-crisis period 2004-2007. On a policy level, our findings call for a termination of the 'one-size-fits-all' approach to the rating methodology for fixed income instruments, requiring an own rating methodology for structured finance instruments. JEL Classification: G21, G28
This paper analyzes the risk properties of typical asset-backed securities (ABS), like CDOs or MBS, relying on a model with both macroeconomic and idiosyncratic components. The examined properties include expected loss, loss given default, and macro factor dependencies. Using a two-dimensional loss decomposition as a new metric, the risk properties of individual ABS tranches can directly be compared to those of corporate bonds, within and across rating classes. By applying Monte Carlo Simulation, we find that the risk properties of ABS differ significantly and systematically from those of straight bonds with the same rating. In particular, loss given default, the sensitivities to macroeconomic risk, and model risk differ greatly between instruments. Our findings have implications for understanding the credit crisis and for policy making. On an economic level, our analysis suggests a new explanation for the observed rating inflation in structured finance markets during the pre-crisis period 2004-2007. On a policy level, our findings call for a termination of the 'one-size-fits-all' approach to the rating methodology for fixed income instruments, requiring an own rating methodology for structured finance instruments. JEL Classification: G21, G28 Keywords: credit risk, risk transfer, systematic risk
The first measurement of two-pion Bose–Einstein correlations in central Pb–Pb collisions at √sNN=2.76 TeV at the Large Hadron Collider is presented. We observe a growing trend with energy now not only for the longitudinal and the outward but also for the sideward pion source radius. The pion homogeneity volume and the decoupling time are significantly larger than those measured at RHIC.
Inclusive transverse momentum spectra of primary charged particles in Pb–Pb collisions at √sNN=2.76 TeV have been measured by the ALICE Collaboration at the LHC. The data are presented for central and peripheral collisions, corresponding to 0–5% and 70–80% of the hadronic Pb–Pb cross section. The measured charged particle spectra in |η|<0.8 and 0.3<pT<20 GeV/c are compared to the expectation in pp collisions at the same sNN, scaled by the number of underlying nucleon–nucleon collisions. The comparison is expressed in terms of the nuclear modification factor RAA. The result indicates only weak medium effects (RAA≈0.7) in peripheral collisions. In central collisions, RAA reaches a minimum of about 0.14 at pT=6–7 GeV/c and increases significantly at larger pT. The measured suppression of high-pT particles is stronger than that observed at lower collision energies, indicating that a very dense medium is formed in central Pb–Pb collisions at the LHC.
Rapidity and transverse momentum dependence of inclusive J/ψ production in pp collisions at √s=7 TeV
(2011)
The ALICE experiment at the LHC has studied inclusive J/ψ production at central and forward rapidities in pp collisions at √s=7 TeV. In this Letter, we report on the first results obtained detecting the J/ψ through the dilepton decay into e+e− and μ+μ− pairs in the rapidity ranges |y|<0.9 and 2.5<y<4, respectively, and with acceptance down to zero pT. In the dielectron channel the analysis was carried out on a data sample corresponding to an integrated luminosity Lint=5.6 nb−1 and the number of signal events is NJ/ψ=352±32(stat.)±28(syst.); the corresponding figures in the dimuon channel are Lint=15.6 nb−1 and NJ/ψ=1924±77(stat.)±144(syst.). The measured production cross sections are σJ/ψ(|y|<0.9)=10.7±1.0(stat.)±1.6(syst.)−2.3+1.6(syst.pol.)μb and σJ/ψ(2.5<y<4)=6.31±0.25(stat.)±0.76(syst.)−1.96+0.95(syst.pol.)μb. The differential cross sections, in transverse momentum and rapidity, of the J/ψ were also measured.
Harmonic decomposition of two particle angular correlations in Pb–Pb collisions at √sNN=2.76 TeV
(2012)
Angular correlations between unidentified charged trigger (t) and associated (a) particles are measured by the ALICE experiment in Pb–Pb collisions at √sNN=2.76 TeV for transverse momenta 0.25<pTt,a<15 GeV/c, where pTt>pTa. The shapes of the pair correlation distributions are studied in a variety of collision centrality classes between 0 and 50% of the total hadronic cross section for particles in the pseudorapidity interval |η|<1.0. Distributions in relative azimuth Δϕ≡ϕt−ϕa are analyzed for |Δη|≡|ηt−ηa|>0.8, and are referred to as “long-range correlations”. Fourier components VnΔ≡〈cos(nΔϕ)〉 are extracted from the long-range azimuthal correlation functions. If particle pairs are correlated to one another through their individual correlation to a common symmetry plane, then the pair anisotropy VnΔ(pTt,pTa) is fully described in terms of single-particle anisotropies vn(pT) as VnΔ(pTt,pTa)=vn(pTt)vn(pTa). This expectation is tested for 1⩽n⩽5 by applying a global fit of all VnΔ(pTt,pTa) to obtain the best values vn{GF}(pT). It is found that for 2⩽n⩽5, the fit agrees well with data up to pTa∼3–4 GeV/c, with a trend of increasing deviation as pTt and pTa are increased or as collisions become more peripheral. This suggests that no pair correlation harmonic can be described over the full 0.25<pT<15 GeV/c range using a single vn(pT) curve; such a description is however approximately possible for 2⩽n⩽5 when pTa<4 GeV/c. For the n=1 harmonic, however, a single v1(pT) curve is not obtained even within the reduced range pTa<4 GeV/c.
The ALICE Collaboration has made the first measurement at the LHC of J/ψ photoproduction in ultra-peripheral Pb–Pb collisions at sNN=2.76 TeV. The J/ψ is identified via its dimuon decay in the forward rapidity region with the muon spectrometer for events where the hadronic activity is required to be minimal. The analysis is based on an event sample corresponding to an integrated luminosity of about 55 μb−1. The cross section for coherent J/ψ production in the rapidity interval −3.6<y<−2.6 is measured to be dσJ/ψcoh/dy=1.00±0.18(stat)−0.26+0.24(syst) mb. The result is compared to theoretical models for coherent J/ψ production and found to be in good agreement with those models which include nuclear gluon shadowing.