CDOs: Are They Still Relevant?
Year: 2008
Type: preprint
Abstract: The subprime debacle of 2007 has caused deep and wide-spread losses in the global financial system and has brought ‘innovative’ structured credit products such as CDOs under bitter criticism. It is argued that while such ‘innovative’ products provided liquidity which fuelled subprime lending, they also led to a wide dispersion of credit risk which exacerbated the contagion effect of the subprime crisis which originated in the U.S but spread across the global financial markets. Given this backdrop, it is useful to understand the technologies used in structuring ‘innovative’ credit product such as CDO and the theoretical motivations underlying these technologies. Using a typical CDO structure, this paper investigates into the motivations underlying the three essential technologies - pooling, securitization and tranching - used in structured credit products, and argues that there are sound motivations which justify the relevance of CDOs as a structured credit product.
Source: SSRN Electronic Journal
Author: Rajiv Bhatt
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W249303157