TY  - JOUR
AU  - Longstaff,Francis A.
AU  - Rajan,Arvind
TI  - An Empirical Analysis of the Pricing of Collateralized Debt Obligations
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12210
PY  - 2006
Y2  - May 2006
UR  - http://www.nber.org/papers/w12210
L1  - http://www.nber.org/papers/w12210.pdf
N1  - Author contact info:
Francis Longstaff
UCLA
Anderson Graduate School of Management
110 Westwood Plaza, Box 951481
Los Angeles, CA  90095-1481
Tel: 310/825-2218
Fax: 310/206-5455
E-Mail: francis.longstaff@anderson.ucla.edu
M2  - featured in NBER digest on 2006-05-15
AB  - We study the pricing of collateralized debt obligations (CDOs) using an extensive new data set for the actively-traded CDX credit index and its tranches. We find that a three-factor portfolio credit model allowing for firm-specific, industry, and economywide default events explains virtually all of the time-series and crosssectional variation in CDX index tranche prices. These tranches are priced as if losses of 0.4, 6, and 35 percent of the portfolio occur with expected frequencies of 1.2, 41.5, and 763 years, respectively. On average, 65 percent of the CDX spread is due to firm-specific default risk, 27 percent to clustered industry or sector default risk, and 8 percent to catastrophic or systemic default risk. Recently, however, firm-specific default risk has begun to play a larger role.
ER  -