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Risks 2017, 5(4), 55; doi:10.3390/risks5040055

Optimal Form of Retention for Securitized Loans under Moral Hazard

1
Department of Finance, HEC Montréal, 3000 Côte-Sainte-Catherine Road, Montreal, QC H3T 2A7, Canada
2
Department of Management, Science and Technology, Amirkabir University of Technology, 424 Hafez Ave, Tehran 15875-4413, Iran
*
Author to whom correspondence should be addressed.
Received: 10 August 2017 / Revised: 14 September 2017 / Accepted: 18 October 2017 / Published: 21 October 2017
(This article belongs to the Special Issue Information and market efficiency)
View Full-Text   |   Download PDF [535 KB, uploaded 21 October 2017]   |  

Abstract

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. View Full-Text
Keywords: securitization; optimal retention; moral hazard; tranching; credit enhancement; conditional loss distribution securitization; optimal retention; moral hazard; tranching; credit enhancement; conditional loss distribution
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Dionne, G.; Malekan, S. Optimal Form of Retention for Securitized Loans under Moral Hazard. Risks 2017, 5, 55.

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