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Market Discipline and Securitization

Malherbe, F; (2012) Market Discipline and Securitization. London Business School: London, UK. Green open access

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Abstract

In this paper, I ask whether securitization really contributes to better risksharing. To do this, I first propose an outcome-based formalization of the concept of market discipline. Then, I compare securitization, which consist of the transfer of risk from existing loans, with other mechanisms that differ in the timing of risk-transfer. I find that, for securitization to be an efficient risk-sharing mechanism, market discipline has to be strong, that is the securitization market outcome should be better than other mechanisms at rewarding diligent loan origination, and adverse selection has to be mild, which seems to seriously restrict the set of assets that should be securitized for risk-sharing motive. Additionally, I show how ex-ante leverage may mitigate interim adverse selection in securitization markets and therefore enhance ex-post risk-sharing. This is interesting because high leverage is usually associated with “excessive” risktaking.

Type: Working / discussion paper
Title: Market Discipline and Securitization
Open access status: An open access version is available from UCL Discovery
Publisher version: http://faculty.london.edu/fmalherbe/MD.pdf
Language: English
Additional information: This version is the version of record. For information on re-use, please refer to the publisher’s terms and conditions.
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL BEAMS
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > UCL School of Management
URI: https://discovery.ucl.ac.uk/id/eprint/10115788
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