As far back as the early-1970s, an increased yield awareness – not least under the impact of the inflationary pressure at that time – gave rise to a greater diversification of private financial investments. As a result, investments with insurance companies or in the bond market moved to the fore in investor’s preferences.
Among the CDOs that invested in subprime mortgage-backed securities, it was common for a single CDO to own hundreds of different mortgage-backed securities, each with its own pool of underlying mortgage loans. Clearly, the valuation of such products and the measurement and hedging of the risks they entail are very complicated.