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Selection of securities for Collateralized Debt Obligations contracts: an optimization approach applied to European SME loan portfolios

Jonard, Matthieu
(2021)

Files

Jonard_45391600_2021.pdf
  • Closed access
  • Adobe PDF
  • 1.32 MB
Jonard_45391600_2021.pdf
  • Closed access
  • Adobe PDF
  • 1.32 MB

Details

Supervisors
Vrins, Frédéric
Faculty
Louvain School of Management
Degree label
Master [120] : ingénieur de gestion, à finalité spécialisée
Abstract
Collateralized Debt Obligations (CDO) are a subclass of financial derivatives that allow banks to transfer their credit risk to external investors. To maximize the transferring power of those products, CDOs must be as attractive as possible for investors. To this aim, we formulate in this thesis a loan selection optimization problem. We consider a problem where the originator of the CDO aims at maximizing the attractiveness of the senior tranche while ensuring that the other tranches still have a coherent risk profile by choosing the right loans to include in the collateral portfolio. This optimization problem is a large-scale non-linear integer optimization problem. Solving the problem is challenging from a numerical point of view. Hence, several approximations and simplifications of the true problem are proposed in this thesis and benchmarked. We observe that the approach developed to solve the problem outperforms benchmark techniques while finding solutions in a few minutes. We also observe that results yielded by the optimization algorithm appear sensitive to some user-defined parameters and that the simplifications perform significantly worse for small portfolios (less than 100 loans).