Optimal security design for risk-averse investors
Optimal security design for risk-averse investors
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 who 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 arises endogenously due to the differences in risk appetites among agents and in the budget constraints they face.
2050-2092
Gershkov, Alex
214a0b5e-c742-486d-b910-c8ec702c943a
Moldovanu, Benny
f84fdd42-3143-4219-be24-fb26385b106d
Strack, Philipp
35074b36-f2b6-439e-bc94-8f469f83d474
Zhang, Mengxi
862887d0-ad62-42e3-bf3d-6b82a872347c
1 June 2025
Gershkov, Alex
214a0b5e-c742-486d-b910-c8ec702c943a
Moldovanu, Benny
f84fdd42-3143-4219-be24-fb26385b106d
Strack, Philipp
35074b36-f2b6-439e-bc94-8f469f83d474
Zhang, Mengxi
862887d0-ad62-42e3-bf3d-6b82a872347c
Gershkov, Alex, Moldovanu, Benny, Strack, Philipp and Zhang, Mengxi
(2025)
Optimal security design for risk-averse investors.
American Economic Review, 115 (6), .
(doi:10.1257/aer.20231597).
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 who 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 arises endogenously due to the differences in risk appetites among agents and in the budget constraints they face.
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Published date: 1 June 2025
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Local EPrints ID: 503784
URI: http://eprints.soton.ac.uk/id/eprint/503784
ISSN: 0002-8282
PURE UUID: 0de56944-c2a6-4c6b-86f0-a5c2e78eec79
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Date deposited: 12 Aug 2025 17:15
Last modified: 13 Aug 2025 03:04
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Contributors
Author:
Alex Gershkov
Author:
Benny Moldovanu
Author:
Philipp Strack
Author:
Mengxi Zhang
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