 Convertible tranche in securitizationXiong Zhang The North American Journal of Economics and Finance, 2020, vol. 52, issue C Abstract: It is essential to motivate a banker in order to diligently screen borrowers if the banker has the option to securitize its loans and sell part of it to outside investors. Based on theoretical analysis and experimental research, we propose that issuing a convertible tranche in securitization can not only motivate a banker to exert greater effort to screen loans, but also lead to higher prices for selling tranches. A convertible tranche can also increase the sale proportion of the loan pool under the condition of ensuring socially optimal effort, thereby increasing more social surplus than a static tranche. The optimal convertible proportion is positively related to the natural proportion of high-default-risk borrowers, the borrowers’ default possibilities, and the screening cost. The value of the convertible option is higher in an economic downturn. Consequently, not only should regulators formulate policies on the convertible proportion under consideration of the economic state, but also adopt a counter-cyclical policy. Keywords: Securitization; Convertible; Tranche; Screen; Experiment (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:52:y:2020:i:c:s1062940820300735 DOI: 10.1016/j.najef.2020.101176 Access Statistics for this article The North American Journal of Economics and Finance is currently edited by Hamid Beladi More articles in The North American Journal of Economics and Finance from Elsevier |
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