Optimal Securitization with Heterogeneous Investors

We solve the problem of optimal securitization for an issuer facing heterogeneous investorswith arbitrary time and risk preferences. We show that the optimal securitizationis characterized by multiple nonlinear tranches, and each investor gets a portfolio of thesetranches. In particular, when all agents have CARA utilities, the linear tranching is optimal,with the number of tranches being less than or equal to the number of potentialinvestors. To the best of our knowledge, this is the rst model in the literature that explainsthe appearance of multiple tranches in the security design and the relation of thetranche thresholds to microeconomic characteristics.[...]