A Top-down Model for Cash CLO

TL;DR

This paper introduces a top-down pricing model for cash CLOs that enhances transparency, consistency, and risk management, while being easy to implement and computationally efficient.

Contribution

It presents a novel top-down approach for cash CLO pricing that is consistent across deals and provides meaningful risk measures.

Findings

Model can price cash CLO tranches within and across deals

Provides meaningful risk measures for cash CLO tranches

Is computationally efficient and easy to implement

Abstract

We propose a top-down model for cash CLO. This model can consistently price cash CLO tranches both within the same deal and across different deals. Meaningful risk measures for cash CLO tranches can also be defined and computed. This method is self-consistent, easy to implement and computationally efficient. It has the potential to bring the much needed pricing transparency to the cash CLO markets; and it could also greatly improve the risk management of cash instruments.