Financial Engineering Practitioners Seminar: Dr. Donal Gallagher
Date: February 08, 2016 from 6:00 pm to 7:30 pm EST
Location: Davis Auditorium, CEPSR Building
Contact: For further information regarding this event, please contact IEOR Department by sending email to info@ieor.columbia.edu .
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Title: Cash Flow CLOs without Monte Carlo Simulation and Open Source XVA/Risk

Abstract: In the shadows of the credit crisis, the pick-up in cash flow CLO issuance coincides with demand for tools offering fast and accurate pricing and risk  analytics.  Unlike synthetic CDOs, where reliable methods were developed by Hull and White (2004), no equivalent methods exist for pricing cash flow CLO tranches. Heightened regulatory and market focus on capital charges associated with securitizations mean fast cash flow CLO pricing is essential when the structure must be re-priced many times for CVA or lifetime cost of capital.

Principal and interest waterfalls create partitions, which map pool redemptions and interest available to the payoff of each tranche. We introduce an analytical approximation that renders cash flow CLOs amenable to semi-analytic pricing. The complication of needing the joint distribution of interest and outstanding notional is reduced to needing only their marginal distributions. We use the exact tranche payoff space partition implicitly with the quantile-quantile (Q-Q) joint distribution of interest and outstanding notional to create the approximation. 

We present results from realistic cash flow CLO examples and show how our approach can be extended to more detailed structural features such as interest coverage tests and over-collateralization tests. 

As part of Quaternion's commitment to open source pricing, the author will also introduce a new open source risk library, useful for XVA and Counterparty exposure calculation, based on the open source pricing library, QuantLib.

Bio: Donal Gallagher is a founding Partner at Quaternion Risk Management; a firm focused on the international development of open source solutions for pricing and risk management. Prior to founding Quaternion, Donal was heavily involved in the remediation of European banks affected by the credit crisis.  His research focuses on counterparty risk and credit instrument pricing and he is co-author with with Roland Lichters and Roland Stamm of "Modern Derivatives Pricing and Credit Exposure Analysis", Palgrave MacMillan, 2015.

Donal holds a Ph.D. from the California Institute of Technology in Applied Mathematics and an M.Sc. in Mathematical Physics from the National University of Ireland (University College Dublin). He lectures part-time in Financial Engineering at Trinity College Dublin.