Stress testing CDOs

Abstract

Analyses regarding the responsibility of risk management for the current credit crises have found a lack of stress tests as one important issue. In this article, we argue that stress tests are even more important a risk management tool with structured finance products like CDOs. We explain why the specific risk profile of such assets requires a dynamic modeling. In an extensive case study a stress test comparison is made between portfolios including convential bonds and structured products. The results clearly show the increased risk contribution of structured products which reveals explicitly only in a dynamic view.