Risk Factors of Collateralized Loan Obligations and Corporate Bonds

Wahrenburg Mark, Andreas Barth, Izadi Mohammad and Rahhal Anas
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Wahrenburg Mark: Dr., Professor für Bankbetriebslehre, Goethe University Frankfurt, House of Finance, Frankfurt/M.
Izadi Mohammad: PhD Student, Goethe University Frankfurt, House of Finance, Frankfurt/M.
Rahhal Anas: Master Student, Goethe University Frankfurt, House of Finance, Frankfurt/M. We thank Christian Kopf, Alexander Ohl, and several members from Union Investment for helpful comments and suggestions.

Zeitschrift für Bankrecht und Bankwirtschaft (ZBB) / Journal of Banking Law and Banking (JBB), 2020, vol. 32, issue 6, 347-355

Abstract: Structured products like collateralized loan obligations (CLOs) tend to offer significantly higher yield spreads than corporate bonds (CBs) with the same rating. At the same time, empirical evidence does not indicate that this higher yield is reduced by higher default losses of CLOs. The evidence thus suggests that CLOs offer higher expected returns compared to CB with similar credit risk. This study aims to analyze whether this return difference is captured by asset pricing factors. We show that market risk is the predominant risk factor for both CBs and CLOs. CLO investors, however, additionally demand a premium for their risk exposure towards systemic risk. This premium is inversely related to the rating class of the CLO.

Date: 2020
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DOI: 10.15375/zbb-2020-0604

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