The Impact of Risk Retention on the Pricing of Securitizations

34 Pages Posted: 18 Jul 2012 Last revised: 2 Mar 2020

See all articles by Martin Thomas Hibbeln

Martin Thomas Hibbeln

University of Duisburg-Essen - Mercator School of Management

Werner Osterkamp

University of Duisburg-Essen - Mercator School of Management

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

Hibbeln, Martin Thomas and Osterkamp, Werner, The Impact of Risk Retention on the Pricing of Securitizations (February 20, 2020). Available at SSRN: https://ssrn.com/abstract=2112002 or http://dx.doi.org/10.2139/ssrn.2112002

Martin Thomas Hibbeln (Contact Author)

University of Duisburg-Essen - Mercator School of Management ( email )

Lotharstraße 65
Duisburg, Nordrhein-Westfalen 47057
Germany
+49 203 379-2830 (Phone)

Werner Osterkamp

University of Duisburg-Essen - Mercator School of Management ( email )

Lotharstraße 65
Duisburg, Nordrhein-Westfalen 47057
Germany

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