How does the market value toxic assets?

Francis A. Longstaff, Brett W. Myers

Research output: Contribution to journalArticle

3 Scopus citations

Abstract

How does the market value toxic structured-credit securities? We study the valuation of what is possibly the most toxic of all toxic assets: the equity tranche of a collateralized debt obligation (CDO). In theory, CDO equity should be similar in nature to bank stock since both represent residual claims on a portfolio of loans. We find CDO equity returns are much more related to stock returns than to fixed-income returns. CDO equity returns track the returns of financial stocks much more closely than any other industry. Nearly two-thirds of the variation in CDO returns can be explained by fundamentals.

Original languageEnglish
Pages (from-to)297-319
Number of pages23
JournalJournal of Financial and Quantitative Analysis
Volume49
Issue number2
DOIs
StatePublished - Mar 10 2014

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