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