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Abstract

This dissertation, consisting of three chapters, explores fire sale risk and contagion emanating from covenants intrinsic to optimal contracts in the Collateralized Loan Obligation (CLO) market. In the first chapter, I describe the rise of the market and the importance of covenants in the capital structure and design of CLOs. In the second chapter, I demonstrate how covenants may generate price pressure and fire sale risk around adverse credit events. In the third chapter, I explore the unintended consequences of covenants on innocent bystanders -- firms with no direct exposure to the source of distress. Unearthing latent risks in the leveraged loan market is important for understanding novel sources of financial fragility and mechanisms of amplification of shocks.

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