Cutting edge intro: CDOs and the risk of risk aversion

New analysis shows CDOs can withstand high levels of correlation – what they can’t cope with, though, is a sudden change in risk appetite


Collateralised debt obligations (CDOs) were once regarded as one of the brightest innovations in finance, giving issuers a way to buy protection on the underlying assets and offering investors a higher return than was available on other, similarly rated products. The party stopped abruptly in mid-2007, as ratings collapsed, defaults rose and liquidity vanished. Fingers immediately pointed at rating agencies and the quants who priced CDOs.

A lot of the blame centred on how banks and rating

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