Security Design in the Real World: Why are Securitization Issues Tranched?

35 Pages Posted: 12 Mar 2005

See all articles by Maciej Firla Cuchra

Maciej Firla Cuchra

University of Oxford - Department of Economics; Said Business School, University of Oxford; Oxford Economic Research Associates (OXERA) Consulting Ltd.

Tim Jenkinson

University of Oxford - Said Business School; European Corporate Governance Institute (ECGI)

Date Written: July 2005

Abstract

Securitisations usually involve creating multiple tranches of a single issue with different characteristics, placed on the market as separate securities. Various theoretical explanations have been advanced to explain such tranching. This paper provides the first systematic testing of such theories using a proprietary database of over 5000 separate tranches in European securitisations raising a total of $1 trillion. We find support for asymmetric information and market segmentation explanations for tranching and present evidence on how such different rationales influence the structuring process in practice. We also investigate the impact of tranching on the price of securities issued. For those issues where our model predicts a higher optimal number of tranches, we find that additional uniquely-rated tranches are associated with higher prices for the issue as a whole.

Keywords: Securitization, tranching, structuring

JEL Classification: G32

Suggested Citation

Firla-Cuchra, Maciej T. and Jenkinson, Tim, Security Design in the Real World: Why are Securitization Issues Tranched? (July 2005). EFA 2005 Moscow Meetings Paper. Available at SSRN: https://ssrn.com/abstract=676730 or http://dx.doi.org/10.2139/ssrn.676730

Maciej T. Firla-Cuchra (Contact Author)

University of Oxford - Department of Economics ( email )

Manor Road Building
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Oxford, OX1 3BJ
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Said Business School, University of Oxford

Park End Street
Oxford, OX1 1HP
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Oxford Economic Research Associates (OXERA) Consulting Ltd.

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Oxford OX1 4EH
United Kingdom

Tim Jenkinson

University of Oxford - Said Business School ( email )

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Oxford, OX1 1HP
United Kingdom
+44 1865 288916 (Phone)
+44 1865 288831 (Fax)

HOME PAGE: http://www.sbs.oxford.edu/timjenkinson

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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