Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/32191
Authors: 
Franke, Günter
Herrmann, Markus
Weber, Thomas
Year of Publication: 
2007
Series/Report no.: 
Discussion paper series // Zentrum für Finanzen und Ökonometrie, Universität Konstanz 2007,10
Abstract: 
The strong growth in collateralized debt obligation transactions raises the question how these transactions are designed. The originator designs the transaction so as to maximize her benefit subject to requirements imposed by investors and rating agencies. An important issue in these transactions is the information asymmetry between the originator and the investors. First Loss Positions are the most important instrument to mitigate conflicts due to information asymmetry. We analyse the optimal size of the First Loss Position in a model and the actual size in a set of European collateralized debt obligation transactions. We find that the asset pool quality, measured by the weighted average default probability and the diversity score of the pool, plays a predominant role for the transaction design. Characteristics of the originator play a small role. A lower asset pool quality induces the originator to take a higher First Loss Position and, in a synthetic transaction, a smaller Third Loss Position. The First Loss Position bears on average 86 % of the expected default losses, independent of the asset pool quality. This loss share and the asset pool quality strongly affect the rating and the credit spread of the lowest rated tranche.
Subjects: 
Securitization
collateralized debt obligations
asset pool quality
First Loss Position
synthetic transactions
tranching
JEL: 
G10
G21
G24
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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