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Securitization, Risk-Taking and the Optionto Change Strategy
Rose Neng Lai1; Robert Van Orde2

This article models the riskiness of structured securitization deals. The dealsare put together by “banks,” which can exercise strategic options over the riskput into the deals. The banks face a trade-off between the benefits of risk-taking now and future franchise benefits if the deal pays off. The key insight isa convex relationship between the value of the bank’s equity position and therisk in the deal. Although there is a continuum of possible risk, banks chooseeither the highest or lowest levels of risk open to them. Changes in strategy arediscontinuous and unpredictable; a history of low risk-taking may be a preludeto increased risk-taking later. Competition, to the extent of reducing franchisevalue, can lead to more risk-taking, as can more information in the market. Themodel provides insights into the risk-taking that led up to the Great Recessionand to institutions that are “Too Big to Fail.”

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Document TypeJournal article
CollectionFaculty of Business Administration
Affiliation1.University of Macau Taipa Macau China
2.George Washington University, Washington, D.C. 2005
First Author AffilicationUniversity of Macau
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GB/T 7714
Rose Neng Lai,Robert Van Orde. Securitization, Risk-Taking and the Optionto Change Strategy[J]. REAL ESTATE ECONOMICS,2014,42(2):343-362.
APA Rose Neng Lai,&Robert Van Orde.(2014).Securitization, Risk-Taking and the Optionto Change Strategy.REAL ESTATE ECONOMICS,42(2),343-362.
MLA Rose Neng Lai,et al."Securitization, Risk-Taking and the Optionto Change Strategy".REAL ESTATE ECONOMICS 42.2(2014):343-362.
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