Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/301031 
Year of Publication: 
2024
Series/Report no.: 
ECONtribute Discussion Paper No. 325
Publisher: 
University of Bonn and University of Cologne, Reinhard Selten Institute (RSI), Bonn and Cologne
Abstract: 
We use the tools of mechanism design, combined with the theory of risk measures, to analyze how a cash constrained owner of an asset with known stochastic returns raises capital from a population of investors that differ in their risk aversion and budget constraints. The issuer partitions the asset's cash flow into several asset-backed securities, one for each type of investor. The optimal partition conforms to the commonly observed practice of tranching into senior debt, junior debt and equity. Tranching endogenously arises due to the differences in risk appetites among agents, and in the budget constraints they face.
Subjects: 
Security Design
Risk Aversion
Tranching
Pooling
JEL: 
D82
G00
Document Type: 
Working Paper

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