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Title

Designed for Failure? Risk-Return Tradeoffs and Risk Management Features of Structured Investment Vehicles

Location

CalPERS, 400 Q Street, Room 2723, Sacramento, CA 95814

Start Time

4/17/2014 12:00 PM

End Time

4/17/2014 1:30 PM

Event Description

Summary: We model the design of a structured investment vehicle (SIV), specifically, its capital structure (senior notes versus capital notes), leverage risk controls, and the rollover frequency of senior debt, all of which determine the rating of the senior notes issued by the SIV. Interestingly, we find that instead of providing safety, stringent risk management controls can accelerate the chances of failure, and optimal risk management choices depend critically on the rollover horizon of the senior notes. We also show that senior-note ratings are very sensitive to leverage controls, oftentimes more so than to the riskiness of the collateral pool, and that inaccurately modeling fire-sale discounts, i.e., the deadweight costs of defeasance, leads to fragile structures that are not designed to sustain inherent levels of risk or to ensure repayment of principal to senior note holders commensurate with a top quality credit rating. The expected losses on senior notes become increasingly sensitive to pool risk (i.e., spread volatility) when leverage controls become more stringent, particularly under shorter roll-over horizons. We propose avenues of mitigating senior note risk through contingent capital, and provide examples of how these methods can transform an unviable SIV to one with substantially lower expected losses on both senior and capital notes.

Event Type

Society

Education Topic

Risk Management

City

Sacramento

State/Province

CA

Event Country

United States

Event Region

Americas

Location Info

CalPERS 400 Q Street Lincoln Plaza East, Room 2723 Sacramento, CA 95814

Speaker

Seoyoung Kim

CE Credits

1.0

SER Credit

1.0

Currency

0

Member Price

0

Non-Member Price

10.00

Candidate Price

0

Registration

https://events.r20.constantcontact.com/register/eventReg?llr=4ysrlbeab&oeidk=a07e93gmy9sb35d7a41&oseq=

Recurrence

 

All Day Event

 

Attachments

Content Type: MyCFA Calendar
Created at 4/2/2014 10:09 AM by HOLLY@CFASS.ORG
Last modified at 4/10/2014 6:00 AM by HOLLY@CFASS.ORG