Market share and risk taking: the role of collateral asset managers in the collapse of the arbitrage CDO market

Thomas Mählmann ()
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Thomas Mählmann: Catholic University of Eichstaett-Ingolstadt

Review of Quantitative Finance and Accounting, 2016, vol. 47, issue 2, No 3, 273-303

Abstract: Abstract Asset pricing theory predicts that if credit ratings do not reflect all relevant aspects of a CDO debt tranche’s risk profile (i.e., its total and systematic risk), then ratings-based tranche pricing by some naïve investors creates incentives for CDO arrangers to take excessive non-priced risk. CDO managers’ desire for repeat issuance makes them part of this risk taking strategy to exploit naïve investors. The implication is that the credit quality of CDOs run by large market share managers has a higher tendency to deteriorate in bad times. This paper finds empirical evidence for large market share manager’s conflicts of interest.

Keywords: Conflict of interest; Credit rating; Collateralized debt obligation; Systematic risk (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1007/s11156-015-0501-9

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