Microtheory Seminar Series. "Optimal Security Design for Risk-Averse Investors (joint with Benny Moldovanu, Philipp Strack and Mengxi Zhang)"
Published: 15 October 2024
29 November 2024. Professor Alex Gershkov, Hebrew University of Jerusalem and University of Surrey
Professor Alex Gershkov, Hebrew University of Jerusalem and University of Surrey
"Optimal Security Design for Risk-Averse Investors (joint with Benny Moldovanu, Philipp Strack and Mengxi Zhang)"
Friday, 29 November 2024. 14:30-16:00
Room 386AB, Adam Smith Business School
Abstract
We use the tools of mechanism design, combined with the theory of risk measures, to analyze a model where a cash constrained owner of an asset with stochastic returns raises capital from a population of investors that differ in their risk aversion and budget constraints. The distribution of the asset's cash flow is assumed here to be common-knowledge: no agent has private information about it. The issuer partitions and sells the asset's realized cash flow into several asset-backed securities, one for each type of investor. The optimal partition conforms to the commonly observed practice of tranching (e.g., senior debt, junior debt and equity) where senior claims are paid before the subordinate ones. The holders of more senior/junior tranches are determined by the relative risk appetites of the different types of investors and of the issuer, with the more risk averse agents holding the more senior tranches. Tranching endogenously arises here in an optimal mechanism because of simple economic forces: the differences in risk appetites among agents, and in the budget constraints they face.
Bio
Alex received his BA in Economics and Accounting, MA in Economics and PhD in Economics from The Hebrew University of Jerusalem (Israel), completing his doctoral studies in 2005. Since that time, he has worked as a Research Fellow and Junior Professor at the University of Bonn, before returning to The Hebrew University of Jerusalem.
Alex divides his time between The Hebrew University of Jerusalem and University of Surrey .
For further information, please contact business-seminar-series@glasgow.ac.uk.
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First published: 15 October 2024