In this paper, we address the crucial problems of parameters estimation of Collateralized Debt Obligation (CDO). We present a methodology for fair spread estimation of reconstituted (CDO) from European market data. A fundamental part of the pricing framework is the estimation of default probabilities and the structure of dependency. We present a copula based simulation procedure for pricing CDO...

The objective of this paper is to help a bank originator of a collateralized debt obligation (CDO) to build a maximally profitable CDO. We consider an optimization framework for structuring CDOs. The objective is to select attachment/ detachment points and underlying instruments in the CDO pool. In addition to “standard” CDOs we study so-called “step-up” CDOs. In a standard CDO contract the att...

This paper considers a problem of security design in the presence of monitoring done by a large investor to discipline the management of a firm. Since the large investor enjoys only part of the benefits generated by her monitoring activities but incurs all the associated costs, the design and amount of security need to be structured so as to motivate her to maintain an efficient level of monito...

A Financial Stability Fund set by a union of sovereign countries (e.g. the European Stability Mechanism) can improve countries’ ability to share risks, borrow and lend, with respect to the standard instrument: sovereign debt financing. Efficiency gains arise from the ability of the fund to offer long-term contingent financial contracts, subject to limited enforcement and moral hazard constraint...

In this article, we first analyze the process of the fluidity control of short-term national debt and think that the short-term national debt market with certain scale can reduce the impact of fluidity to commercial banks, then compare three tools usually used in open market operations, i.e. middle and long term national debt, central bank bill and short-term national debt and the results show ...

Although bank capital regulation permits a bank to choose freely between equity and subordinated debt to meet capital requirements, lenders and investors view debt and equity as imperfect substitutes. It follows that the mix of debt in regulatory capital should isolate the role that the market plays in disciplining banks. I document that since the Federal Deposit Insurance Corporation Improveme...

The Sukuk market has become the fastest growing segment of the Islamic financial services industry. Governments and other corporate entities have started tapping the local and international Sukuk markets in order to raise the required funds. The investor base is also expanding and Sukuk has now become a popular and obvious choice for retail investors in a number of jurisdictions. However, becau...

We study portfolio allocation and characterize contracts issued by firms in the international financial market when investors exhibit ambiguity aversion and perceive ambiguity in assets issued in foreign locations. Increases in the variance of their risky production process cause firms to issue assets with a higher variable payment (equity). Hikes in investors’ perceived ambiguity have the oppo...