Investors’ heterogeneity and tranching

Frank Yong Wang, Xu Wei and Li Li

Applied Economics, 2016, vol. 48, issue 38, 3679-3684

Abstract: The article presents a theoretic model of tranching in asset securitization. When potential buyers are heterogeneous in the constraint on their portfolios, we find that senior tranche, which is less risky and created by tranching, will introduce more investors and thus reduce risk exposure to investors. Thus, tranching helps improve the sale’s revenue. We also find that the portfolio constraints of investors are always binding at optimum, which is called marginal rating.

Date: 2016
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DOI: 10.1080/00036846.2016.1142661

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