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Securitization, Transparency and Liquidity

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Author Info
Pagano, Marco
Volpin, Paolo

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Abstract

We present a model in which issuers of structured bonds choose coarse and opaque ratings to enhance the liquidity of their primary market, at the cost of reducing secondary market liquidity or even causing it to freeze. The degree of transparency is inefficiently low if the social value of secondary market liquidity exceeds its private value. We analyze various types of public intervention -- requiring transparency for rating agencies, providing liquidity to distressed banks or supporting secondary market prices -- and find that their welfare implications are quite different. Finally, transparency is greater if issuers restrain the issue size, or tranche it so as to sell the more information-sensitive tranche to sophisticated investors only.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7105.

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Date of creation: Dec 2008
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Handle: RePEc:cpr:ceprdp:7105

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Related research
Keywords: default; liquidity; rating; securitization; subprime lending crisis; transparency;

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Gary B. Gorton, 2008. "The Panic of 2007," NBER Working Papers 14358, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Peter M. DeMarzo, 2005. "The Pooling and Tranching of Securities: A Model of Informed Intermediation," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 18(1), pages 1-35. [Downloadable!] (restricted)
  3. Gorton, Gary & Pennacchi, George, 1990. " Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, vol. 45(1), pages 49-71, March. [Downloadable!] (restricted)
  4. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March. [Downloadable!] (restricted)
    Other versions:
  5. Boot, Arnoud W A & Thakor, Anjan V, 1993. " Security Design," Journal of Finance, American Finance Association, vol. 48(4), pages 1349-78, September. [Downloadable!] (restricted)
    Other versions:
  6. Emmanuel Farhi & Josh Lerner & Jean Tirole, 2008. "Fear of Rejection? Tiered Certification and Transparency," NBER Working Papers 14457, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity, monetary policy, and financial cycles," Current Issues in Economics and Finance, Federal Reserve Bank of New York, issue Jan. [Downloadable!]
  8. Patrick Bolton & Xavier Freixas & Joel Shapiro, 2009. "The Credit Ratings Game," NBER Working Papers 14712, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 187-212. [Downloadable!] (restricted)
  10. Markus K. Brunnermeier, 2008. "Deciphering the Liquidity and Credit Crunch 2007-08," NBER Working Papers 14612, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Benveniste, Lawrence M. & Spindt, Paul A., 1989. "How investment bankers determine the offer price and allocation of new issues," Journal of Financial Economics, Elsevier, vol. 24(2), pages 343-361. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Patrick Bolton & Xavier Freixas & Joel Shapiro, 2009. "The Credit Ratings Game," NBER Working Papers 14712, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Taylor D. Nadauld & Shane M. Sherlund, 2009. "The role of the securitization process in the expansion of subprime credit," Finance and Economics Discussion Series 2009-28, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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