Empirical Evidence on CDO Performance

Abstract

Despite the recent infamy of collateralized debt obligations (CDOs), there is a dearth of literature quantifying the performance of this fixed-income product. While performance is usually measured in terms of return relative to a benchmark, lack of pricing information necessitates an alternative methodology for assessing CDO performance. In this article, we use rating changes (principally downgrades) to assess 10 types of CDOs across 11 vintages, analyzing 4,328 CDOs and 13,333 tranches in total. We find the following: Asset-backed CDOs have performed far worse than other CDOs issued 1999–2007. Market value CDOs are the second-worse performers. Collateralized loan obligations (CLOs) and CDOs backed by emerging market bonds, investment-grade bonds, and high-yield bonds have significantly outperformed other types of CDOs over the last four years of issuance.