The Impact of Risk Retention on the Pricing of Securitizations
34 Pages Posted: 18 Jul 2012 Last revised: 2 Mar 2020
Date Written: February 20, 2020
Abstract
We examine whether investors of securitizations anticipate screening and monitoring incentives of originators. Theoretical literature suggests that equity retention leads to a maximization of screening efforts; thus, equity retention should result in a reduction of credit spreads if investors anticipate these incentives. Implementing an instrumental variable approach, we infer the causal effect of retention on spreads. Using a unique data set of securitizations, we find for information sensitive tranches, for which screening and monitoring incentives have the greatest impact, that investors require an additional risk premium of 120 basis points if originators do not retain a material share of securitizations. Furthermore, deals with vertical slice retention have a significantly higher risk premium compared to deals with equity retention.
Keywords: security design, asset-backed securities, retention, credit spreads
JEL Classification: D82, G01, G21, G24
Suggested Citation: Suggested Citation