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Equilibrium securitization with diverse beliefs

Author

Listed:
  • Ellis, Andrew

    (Department of Economics, London School of Economics and Political Science)

  • Piccione, Michele

    (Department of Economics, London School of Economics and Political Science)

  • Zhang, Shengxing

    (Department of Economics, London School of Economics and Political Science)

Abstract

We study the effects of diverse beliefs on equilibrium securitization under risk neutrality. We provide a simple characterization of the optimal securities. Pooling and tranching of assets emerges in equilibrium as a consequence of the traders' diverse beliefs about asset returns. The issuer of securities tranches the asset pool, and traders sort among the tranches according to their beliefs. We show how the traders' disagreement about the correlation of asset returns is a key factor in determining which assets are pooled.

Suggested Citation

  • Ellis, Andrew & Piccione, Michele & Zhang, Shengxing, 2022. "Equilibrium securitization with diverse beliefs," Theoretical Economics, Econometric Society, vol. 17(1), January.
    • Handle: RePEc:the:publsh:4157
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    References listed on IDEAS

    as
    1. Franklin Allen, Douglas Gale, 1988. "Optimal Security Design," The Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 229-263.
    2. Joshua Coval & Jakub Jurek & Erik Stafford, 2009. "The Economics of Structured Finance," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 3-25, Winter.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Securitization; heterogeneous beliefs; collateral; tranching; pooling;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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