Valuing CDOs of ABSs

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In this article, we value tranches of CDOs of asset-backed securities (ABSs), with particular focus on CDOs of subprime residential mortgage-backed securities (RMBSs).

CDOs of ABSs are more difficult to value than CDOs referenced to corporate credits. This is because:

- The assets in the CDO collateral pool are themselves tranches of ABS deals, which in turn are supported by collateral pools containing the ultimate underlying assets, for example, subprime mortgages. A CDO of ABSs is therefore two

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