Optimal Form of Retention for Securitized Loans under Moral Hazard
We address the moral hazard problem of securitization using a principal-agent model where the investor is the principal and the lender is the agent. Our model considers structured asset-backed securitization with a credit enhancement (tranching) procedure. We assume that the originator can affect th...
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| Format: | Article |
| Language: | English |
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MDPI AG
2017-10-01
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| Series: | Risks |
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| Online Access: | https://www.mdpi.com/2227-9091/5/4/55 |
| _version_ | 1818994908653944832 |
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| author | Georges Dionne Sara Malekan |
| author_facet | Georges Dionne Sara Malekan |
| author_sort | Georges Dionne |
| collection | DOAJ |
| description | We address the moral hazard problem of securitization using a principal-agent model where the investor is the principal and the lender is the agent. Our model considers structured asset-backed securitization with a credit enhancement (tranching) procedure. We assume that the originator can affect the default probability and the conditional loss distribution. We show that the optimal form of retention must be proportional to the pool default loss even in the absence of systemic risk when the originator can affect the conditional loss given default rate, yet the current regulations propose a constant retention rate. |
| first_indexed | 2024-12-20T21:05:26Z |
| format | Article |
| id | doaj.art-f6061698f7e140cb9f6a62153eff0178 |
| institution | Directory Open Access Journal |
| issn | 2227-9091 |
| language | English |
| last_indexed | 2024-12-20T21:05:26Z |
| publishDate | 2017-10-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Risks |
| spelling | doaj.art-f6061698f7e140cb9f6a62153eff01782022-12-21T19:26:36ZengMDPI AGRisks2227-90912017-10-01545510.3390/risks5040055risks5040055Optimal Form of Retention for Securitized Loans under Moral HazardGeorges Dionne0Sara Malekan1Department of Finance, HEC Montréal, 3000 Côte-Sainte-Catherine Road, Montreal, QC H3T 2A7, CanadaDepartment of Management, Science and Technology, Amirkabir University of Technology, 424 Hafez Ave, Tehran 15875-4413, IranWe address the moral hazard problem of securitization using a principal-agent model where the investor is the principal and the lender is the agent. Our model considers structured asset-backed securitization with a credit enhancement (tranching) procedure. We assume that the originator can affect the default probability and the conditional loss distribution. We show that the optimal form of retention must be proportional to the pool default loss even in the absence of systemic risk when the originator can affect the conditional loss given default rate, yet the current regulations propose a constant retention rate.https://www.mdpi.com/2227-9091/5/4/55securitizationoptimal retentionmoral hazardtranchingcredit enhancementconditional loss distribution |
| spellingShingle | Georges Dionne Sara Malekan Optimal Form of Retention for Securitized Loans under Moral Hazard Risks securitization optimal retention moral hazard tranching credit enhancement conditional loss distribution |
| title | Optimal Form of Retention for Securitized Loans under Moral Hazard |
| title_full | Optimal Form of Retention for Securitized Loans under Moral Hazard |
| title_fullStr | Optimal Form of Retention for Securitized Loans under Moral Hazard |
| title_full_unstemmed | Optimal Form of Retention for Securitized Loans under Moral Hazard |
| title_short | Optimal Form of Retention for Securitized Loans under Moral Hazard |
| title_sort | optimal form of retention for securitized loans under moral hazard |
| topic | securitization optimal retention moral hazard tranching credit enhancement conditional loss distribution |
| url | https://www.mdpi.com/2227-9091/5/4/55 |
| work_keys_str_mv | AT georgesdionne optimalformofretentionforsecuritizedloansundermoralhazard AT saramalekan optimalformofretentionforsecuritizedloansundermoralhazard |