Optimal Form of Retention for Securitized Loans Under Moral Hazard

Risks, https://www.mdpi.com/2227-9091/5/4/55/pdf

28 Pages Posted: 29 Nov 2015 Last revised: 5 Jan 2023

See all articles by Georges Dionne

Georges Dionne

HEC Montreal - Department of Finance

Sara Malekan

HEC Montreal - Department of Finance

Date Written: November 27, 2015

Abstract

We address the moral hazard problem of securitization using a principal-agent model where the investor is the principal and the lender is the agent. Our model considers structured asset-backed securitization with a credit enhancement procedure. We assume that the originator can affect the default probability and the conditional loss distribution. We show that the optimal form of retention must be proportional to the pool default loss even in the absence of systemic risk when the originator can affect the conditional distribution of portfolio losses, yet the current regulations propose a constant retention rate.

Keywords: Securitization, optimal retention, moral hazard, principal-agent model, tranching, credit enhancement, conditional loss distribution.

JEL Classification: D80, G01, G18, G21, G28.

Suggested Citation

Dionne, Georges and Malekan, Sara, Optimal Form of Retention for Securitized Loans Under Moral Hazard (November 27, 2015). Risks, https://www.mdpi.com/2227-9091/5/4/55/pdf, Available at SSRN: https://ssrn.com/abstract=2696252 or http://dx.doi.org/10.2139/ssrn.2696252

Georges Dionne (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6596 (Phone)
514-340-5019 (Fax)

HOME PAGE: http://www.hec.ca/gestiondesrisques/

Sara Malekan

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

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