CDOs
Synthetic CDO Equity: Short or Long Correlation Risk?
Robert A. Jarrow; Donald R. Deventer
THE JOURNAL OF FIXED INCOME
Spring 2008
This article clarifies and contests the common market belief that synthetic CDO equity is long correlation risk, i.e. as correlation increases equity spreads decline. In fact, the impact of correlation on CDO equity spreads is indeterminate apriori and model specific. We argue that, for realistic models, CDO equity will be short correlation risk, contrary to common belief.
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About The Journal of Fixed Income
The Journal of Fixed Income is the expert's comprehensive guide to bond theory and practice. It brings you sophisticated research and revealing case studies on bonds, high-yield bonds, municipals, ABSs, MBSs, CDOs, and credit derivatives. Industry experts offer penetrating analysis on fixed income structuring, performance tracking, and risk management.
Robert A. Jarrow; Donald R. Deventer
THE JOURNAL OF FIXED INCOME
Spring 2008
This article clarifies and contests the common market belief that synthetic CDO equity is long correlation risk, i.e. as correlation increases equity spreads decline. In fact, the impact of correlation on CDO equity spreads is indeterminate apriori and model specific. We argue that, for realistic models, CDO equity will be short correlation risk, contrary to common belief.
Buy this article $ Subscribe to Journal $
About The Journal of Fixed Income
The Journal of Fixed Income is the expert's comprehensive guide to bond theory and practice. It brings you sophisticated research and revealing case studies on bonds, high-yield bonds, municipals, ABSs, MBSs, CDOs, and credit derivatives. Industry experts offer penetrating analysis on fixed income structuring, performance tracking, and risk management.