Default Correlations, Skin in the Game and Insurance: Can Prices be Increasing in Risk?

Default Correlations, Skin in the Game and Insurance: Can Prices be Increasing in Risk? | Research Square window.SnipcartSettings = { analytics: { enabled: false } }; (function() { var accessVector = localStorage.getItem('access_vector') || ''; window.dataLayer = window.dataLayer || []; if (accessVector) { window.dataLayer.push({ user: { profile: { profileInfo: { snid: accessVector } } } }); } })(); (function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start':new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0],j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src='https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f);})(window,document,'script','dataLayer','GTM-K279D39R'); Browse Preprints In Review Journals COVID-19 Preprints AJE Video Bytes Research Tools Research Promotion AJE Professional Editing AJE Rubriq About Preprint Platform In Review Editorial Policies Our Team Advisory Board Help Center Sign In Submit a Preprint Cite Share Download PDF Research Article Default Correlations, Skin in the Game and Insurance: Can Prices be Increasing in Risk? David Echeverry This is a preprint; it has not been peer reviewed by a journal. https://doi.org/ 10.21203/rs.3.rs-6627131/v1 This work is licensed under a CC BY 4.0 License Status: Posted Version 1 posted You are reading this latest preprint version Abstract This paper develops a theoretical model to analyze the pricing of default correlations in securitization markets. I examine how risk retention by investors, known as "skin in the game," interacts with correlation risk to influence the value of senior securities. When correlations between default events are high, investors require more risk retention through subordination to protect against loss, which in turn impacts pricing. The model highlights the endogenous relationship between subordination levels and correlation, providing insights into the pricing of risk in structured finance. JEL classification: G12, G21, C63, D53, G32 Financial Mathematics Correlated defaults Bernoulli distribution structured finance security prices skin in the game Full Text Additional Declarations The authors declare no competing interests. Cite Share Download PDF Status: Posted Version 1 posted You are reading this latest preprint version Research Square lets you share your work early, gain feedback from the community, and start making changes to your manuscript prior to peer review in a journal. As a division of Research Square Company, we’re committed to making research communication faster, fairer, and more useful. We do this by developing innovative software and high quality services for the global research community. Our growing team is made up of researchers and industry professionals working together to solve the most critical problems facing scientific publishing. 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