Why are Securitization Issues Tranched?
Maciej Firla-Cuchra: Department of Economics, Oxford University
Tim Jenkinson: Said Business School, Oxford University and CEPR
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.
JEL
classification: G14, G15, G32
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