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Mark-to-market, oversight, and sensitivity analysis of CDOs

categories: RiskMetrics RiskManager, RiskMetrics Journal, general

We present a framework that can be used to value CDOs and model the risk characteristics of each tranche as the collateral pool evolves. A consistent valuation and oversight framework for CDOs could accelerate the development of a secondary market. An oversight framework can also be used by buy-and-hold investors, since mark-to-market changes can signal potential realized losses. To illustrate our approach, we present a case study of the impact that various changes in the collateral pool would have on a simple CDO structure.


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