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A Liquidity-Based Model of Security Design

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Author Info
Peter DeMarzo
Darrell Duffie
Abstract

The authors consider the problem of design and sale of a security backed by specified assets. Given access to higher-return investments, the issuer has an incentive to raise capital by securitizing part of these assets. At the time the security is issued, the issuer's or underwriter's private information regarding the payoff of the security may cause illiquidity in the form of a downward-sloping demand curve for the security. The authors characterize the optimal security design in several cases. They also demonstrate circumstances under which standard debt is optimal and show that the riskiness of the debt is increasing in the issuer's retention costs for assets.

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Publisher Info
Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 67 (1999)
Issue (Month): 1 (January)
Pages: 65-100
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Handle: RePEc:ecm:emetrp:v:67:y:1999:i:1:p:65-100

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  1. Gann, Philipp, 2009. "Liquidität, Risikoeinstellung des Kapitalmarktes und Konjunkturerwartung als Preisdeterminanten von Collateralized Debt Obligations (CDOs) - Eine simulationsgestützte Analyse," Discussion Papers in Business Administration 10582, University of Munich, Munich School of Management. [Downloadable!]
  2. Pagès, H., 2009. "Bank incentives and optimal CDOs," Documents de Travail 253, Banque de France. [Downloadable!]
  3. Andrea Attar & Thomas Mariotti & Francois Salanie, 2009. "Non-Exclusive Competition in the Market for Lemons," Working Papers 09.13.289, LERNA, University of Toulouse. [Downloadable!]
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  4. Andreas Gintschel & Andreas Hackethal, 2004. "Multi-Bank Loan Pool Contracts: Enhancing the Profitability of Small Commercial Banks," Working Paper Series: Finance and Accounting 129, Department of Finance, Goethe University Frankfurt am Main. [Downloadable!]
  5. Jullien, Bruno & Mariotti, Thomas, 2002. "Auction and the Informed Seller Problem," IDEI Working Papers 145, Institut d'Économie Industrielle (IDEI), Toulouse, revised Oct 2004. [Downloadable!]
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  6. W. Scott Frame & Lawrence J. White, 2009. "Technological change, financial innovation, and diffusion in banking," Working Paper 2009-10, Federal Reserve Bank of Atlanta. [Downloadable!]
  7. Inderst, Roman & Mueller, Holger M, 2005. "Informed Lending and Security Design," CEPR Discussion Papers 5185, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  8. Kaplan, Steven & Strömberg, Per Johan, 2000. "Financial Contracting Theory Meets The Real World: An Empirical Analysis Of Venture Capital Contracts," CEPR Discussion Papers 2421, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  9. Matej Marinč, 2009. "Bank Monitoring and Role of Diversification," Transition Studies Review, Springer, vol. 16(1), pages 77-91, May. [Downloadable!] (restricted)
  10. Inderst, Roman & Mueller, Holger M, 2005. "Keeping the Board in the Dark: CEO Compensation and Entrenchment," CEPR Discussion Papers 5315, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  11. Matthew Pritsker, 2005. "Large investors: implications for equilibrium asset, returns, shock absorption, and liquidity," Finance and Economics Discussion Series 2005-36, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  12. Bhagwan Chowdhry & Mark Grinblatt & David Levine, 2002. "Information Aggregation, Security Design and Currency Swaps," NBER Working Papers 8746, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Kazuhiko Ohashi, 2003. "When Should a CAT Index Futures Be Created?," ISER Discussion Paper 0576, Institute of Social and Economic Research, Osaka University. [Downloadable!]
  14. Marc-Andreas Muendler, 2005. "The Action Value of Information and the Natural Transparency Limit¤," University of California at San Diego, Economics Working Paper Series 2005-09, Department of Economics, UC San Diego. [Downloadable!]
  15. Biais, Bruno & Mariotti, Thomas, 2003. "Strategic Liquidity Supply and Security Design," IDEI Working Papers 160, Institut d'Économie Industrielle (IDEI), Toulouse, revised Mar 2004. [Downloadable!]
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  16. Di Cesare, Antonio, 2009. "Securitization and Bank Stability," MPRA Paper 16831, University Library of Munich, Germany. [Downloadable!]
  17. Bhagwan Chowdhry & Mark Grinblatt & David K Levine, 2001. "Information Aggregation, Currency Swaps, and the Design of Derivative Securities," Levine's Working Paper Archive 2106, David K. Levine. [Downloadable!]
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  18. Antonio Nicolo' & Loriana Pelizzon, 2005. "Credit Derivatives: Capital Requirements and Strategic Contracting," "Marco Fanno" Working Papers 0006, Dipartimento di Scienze Economiche "Marco Fanno". [Downloadable!]
  19. Efraim Benmelech & Jennifer Dlugosz, 2009. "The Credit Rating Crisis," NBER Working Papers 15045, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  20. Peter M. DeMarzo & Ilan Kremer & Andrzej Skrzypacz, 2004. "Bidding With Securities: Auctions and Security Design," NBER Working Papers 10891, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  21. Brent Ambrose & Michael LaCour-Little & Anthony Sanders, 2005. "Does Regulatory Capital Arbitrage, Reputation, or Asymmetric Information Drive Securitization?," Journal of Financial Services Research, Springer, vol. 28(1), pages 113-133, October. [Downloadable!] (restricted)
  22. Efraim Benmelech & Jennifer Dlugosz, 2009. "The Alchemy of CDO Credit Ratings," NBER Working Papers 14878, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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