Semi-analytic Approaches to Collateralized Debt Obligation Modelling

Collateralized debt obligations (CDOs) constitute an important class of asset-backed securities. Most major banks use CDOs as portfolio management tools for achieving regulatory capital relief, economic risk transfer and funding. On the other side, banks and other financial institutions invest in CDO tranches with a risk/return profile matching their risk appetite and investment policies. For both sides (risk selling and risk buying) of a CDO transaction, sound mathematical tools are required for an evaluation of the deal. In this paper, we investigate some techniques for CDO modelling, paying special attention to approaches based on semi-analytic approximations. Copyright Banca Monte dei Paschi di Siena SpA, 2004