Optimal tranching with diverse beliefs

Guixia Guo, Frank Yong Wang and Xu Wei

Economics Letters, 2014, vol. 124, issue 2, 222-226

Abstract: In this paper, we consider the optimal selling strategy for an asset securitization originator (the issuer) when the potential buyers hold diverse beliefs. We find that the tranching process is beneficial to the issuer because it increases the total sale price. We also consider the optimal tranching strategy that maximizes the revenue of the issuer. This helps explain the widespread use of the tranching technique in the asset securitization practice. Our findings are also enlightening to understand the price bubble problem when the junior tranche is interpreted as a collateral.

Keywords: Optimal tranching; Diverse beliefs; Second order stochastic dominance; Price bubble (search for similar items in EconPapers)
JEL-codes: D84 G12 G21 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:124:y:2014:i:2:p:222-226

DOI: 10.1016/j.econlet.2014.05.030

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