Credit Risk Analysis of Cashflow CDO Structures

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Credit Risk Analysis of Cashflow CDO Structures

by Philippos Papadopoulos of ABN AMRO, and
Caroline I.M.L. Tan of ABN AMRO

July 31, 2007

Abstract: We develop a method that offers consistent and computationally efficient credit risk analysis of cashflow CDO structures. The proposal makes use of single factor portfolio models (admitting semi-analytic representations of the loss distribution) combined with detailed and fast calculations of realistic interest and principal cashflow waterfalls. We define and study consistent credit tranche risk measures such as the probability of loss and expected loss-given-loss but also the variance of the latter. We benchmark our approach against the stress-scenario based analysis favored by cashflow CDO market practitioners.

Keywords: cashflow, cdo, clo, waterfall, credit risk, credit rating, risk measures, single factor, triggers, debt covenants, Vasicek, overcollateralization.

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