Abstract
Our ability today to construct a great number of portfolios that all satisfy the same set of static collateralized debt obligation (CDO) investment guideline, can potentially introduce credit hot spots that will not be detected by traditional rating agency measures. As more and more CDO market participants recognize these risks, they are turning to market-based measures such as bond and loan prices and debt-equity models to parse credit aberrations in credit portfolios and detect selection biases. Various market-based information and models will be helpful in CDO and cash-based portfolio selection. New asset selection tools for structured credit products allow investors to benchmark the performance of seasoned CDO tranches.
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