The authors address the moral hazard problem of securitization using a principal-agent model
where the investor is the principal and the lender is the agent. Their model considers structured
asset-backed securitization with a credit enhancement (tranching) procedure. They assume that the originator can affect the default probability and the conditional loss distribution. They 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 loss given default rate, yet the current regulations propose a constant retention rate. Click here to read the whole article.
-Georges Dionne Department of Finance, HEC Montréal, 3000 Côte-Sainte-Catherine Road, Montreal, QC H3T 2A7, Canada
-Sara Malekan Department of Management, Science and Technology, Amirkabir University of Technology, 424 Hafez Ave, Tehran 15875-4413, Iran; email@example.com
Classification Codes: D80; D82; D86; G14; G21