Optimal form of retention for securitized loans under moral hazard

Georges Dionne () and Sara Malekan ()
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Sara Malekan: HEC Montreal, Canada Research Chair in Risk Management, Postal: 3000, Chemin Cote-Ste-Catherine, room 4.454, Montreal (QC) Canada, H3T 2A7

No 15-4, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

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 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 distribution of portfolio losses, yet the current regulations propose a constant retention rate.

Keywords: Securitization; optimal retention; moral hazard; principal-agent model; tranching; credit enhancement; conditional loss distribution. (search for similar items in EconPapers)
JEL-codes: D80 D82 D86 G18 G21 G23 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2015-11-27
New Economics Papers: this item is included in nep-cta and nep-rmg
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Related works:
Journal Article: Optimal Form of Retention for Securitized Loans under Moral Hazard (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:crcrmw:2015_004

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