Information Asymmetries and Securitization Design

60 Pages Posted: 21 Mar 2008

See all articles by Guenter Franke

Guenter Franke

University of Konstanz - Department of Economics

Markus Herrmann

affiliation not provided to SSRN

Thomas Weber

University of Konstanz - Department of Economics

Date Written: December 1, 2007

Abstract

The strong growth in collateralized debt obligation transactions raises the question how these transactions are designed. The originator designs the transaction so as to maximize her benefit subject to requirements imposed by investors and rating agencies. An important issue in these transactions is the information asymmetry between the originator and the investors. First Loss Positions are the most important instrument to mitigate conflicts due to information asymmetry. We analyse the optimal size of the First Loss Position in a model and the actual size in a set of European collateralized debt obligation transactions. We find that the asset pool quality, measured by the weighted average default probability and the diversity score of the pool, plays a predominant role for the transaction design. Characteristics of the originator play a small role. A lower asset pool quality induces the originator to take a higher First Loss Position and, in a synthetic transaction, a smaller Third Loss Position. The First Loss Position bears on average 86 % of the expected default losses, independent of the asset pool quality. This loss share and the asset pool quality strongly affect the rating and the credit spread of the lowest rated tranche.

Keywords: Securitization, collateralized debt obligations, asset pool quality, First Loss Position, synthetic transactions, tranching

JEL Classification: G 10, G 21, G 24

Suggested Citation

Franke, Guenter and Herrmann, Markus and Weber, Thomas A., Information Asymmetries and Securitization Design (December 1, 2007). Available at SSRN: https://ssrn.com/abstract=1107877 or http://dx.doi.org/10.2139/ssrn.1107877

Guenter Franke (Contact Author)

University of Konstanz - Department of Economics ( email )

Fach 147
Konstanz, 78457
Germany
+49 7531 88 2545 (Phone)
+49 7531 88 3559 (Fax)

Markus Herrmann

affiliation not provided to SSRN

Thomas A. Weber

University of Konstanz - Department of Economics ( email )

Konstanz, D-78457
Germany