Why Are Securitization Issues Tranched?

Tim Jenkinson

No 2005-FE-04, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: Securitisations usually involve creating multiple tranches of a single issue with different characteristics, placed on the market as separate securities. Various theoretical explanations have been advanced to explain such tranching. This paper provides the first systematic testing of such theories using a proprietary database of over 5000 separate tranches in European securitisations raising a total of $1 trillion. We find support for asymmetric information and market segmentation explanations for tranching and present evidence on how such different rationales influence the structuring process in practice. We also investigate the impact of tranching on the price of securities issued. For those issues where our model predicts a higher optimal number of tranches, we find that additional uniquely-rated tranches are associated with higher prices for the issue as a whole.

JEL-codes: G14 G15 G32 (search for similar items in EconPapers)
Date: 2005-03-01
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Citations: View citations in EconPapers (17)

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Working Paper: Why are Securitization Issues Tranched? (2005)
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