Revisiting the Pricing of Systematic Risk Premia for Collateralized Loan Obligations in Practice: An Empirical Study of Western European Collateralized Obligations

Peter Holm Yde

Student thesis: Master thesis


This thesis explores whether investors require a risk premia for systematic risk when pricing Western European collateralized loan obligations (CLOs) from 2017 to 2020. I derive a set of special purpose vehicle (SPV) characteristics which are suggested to drive the systematic risk of issued tranches. If investors require risk premia according to the systematic risk of the tranche, the systematic risk drivers derived are hypothesized to have a significant impact on required launch spreads. None of the systematic risk drivers are found to have a robust significant impact on launch spreads for CLOs in this thesis. The implication of the results is that investors do not require a risk premia for the systematic risk in CLOs which implies CLO tranches to be overpriced. The complexity of structured debt is suggested to be the reason as it leaves investors barred from properly understanding the risk profile of the tranches. Instead, the risk assessment is suspected to be delegated to rating agencies which do not consider systematic risk in their rating methodologies. Further research is suggested to provide insight into what causes the lack of systematic risk premia and the methodologies used by investors for systematic risk assessment in practice.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2020
Number of pages135
SupervisorsDavid Lando