Default risk sharing between banks and markets: The contribution of collateralized debt obligations

Günter Franke and Jan Krahnen ()

No 05/04, CoFE Discussion Papers from University of Konstanz, Center of Finance and Econometrics (CoFE)

Abstract: This paper contributes to the economics of financial institutions risk management by exploring how loan securitization affects their default risk, their systematic risk, and their stock prices. In a typical CDO transaction a bank retains through a first loss piece a very high proportion of the default losses, and transfers only the extreme losses to other market participants. The size of the first loss piece is largely driven by the average default probability of the securitized assets. If the bank sells loans in a true sale transaction, it may use the proceeds to expand its loan business, thereby affecting systematic risk. For a sample of European CDO issues, we find an increase of the banks' betas, but no significant stock price effect around the announcement of a CDO issue.

JEL-codes: D74 D82 G21 (search for similar items in EconPapers)
Date: 2005
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (34)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/32167/1/504463128.pdf (application/pdf)

Related works:
Chapter: Default Risk Sharing between Banks and Markets: The Contribution of Collateralized Debt Obligations (2007)
Working Paper: Default Risk Sharing Between Banks and Markets: The Contribution of Collateralized Debt Obligations (2005)
Working Paper: Default risk sharing between banks and markets: The contribution of collateralized debt obligations (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:cofedp:0504

Access Statistics for this paper

More papers in CoFE Discussion Papers from University of Konstanz, Center of Finance and Econometrics (CoFE) Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().