Leveraged loan market was in crisis in the summer of 2007, after many years of low realized volatility (less than 4% per annum), the index of leveraged loans fell by more than 5% in July. A sharp drop in the market prices of equity asset class can be called news affecting fundamental values, or widespread liquidity shock. The meaning of a shock to the fundamental value is that the price reduction is permanent, whereas, if the main reason for the fall in prices due to the liquidity event, the situation can be a profitable investment opportunity. Investors should assess the likely reasons for the recent price drops in loan credit market and determine the appropriate investment strategy. "Hide
by Andre F. Perold, Eric Stafford Source: Harvard Business School 7 pages. Publication Date: April 7, 2008. Prod. #: 208145-PDF-ENG
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