The impact of risk retention on the pricing of securitizations

Abstract Loan screening and monitoring are critical to loan performance, but incentives are diminished for securitized loans. Risk retention is intended to harmonize the interests of originators and investors; however, it is unclear to what extent investors anticipate and respond to originators’ screening and monitoring incentives, particularly with respect to different types of risk retention. The theoretical literature suggests that equity retention is optimal in terms of screening efforts; th