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Securitization, Transparency and Liquidity

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  • Marco Pagano

    (University of Naples Federico II and EIEF)

  • Paolo Volpin

    (London Business School)

Abstract

We present a model in which issuers of asset backed securities choose to release coarse information 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 — mandatory transparency standards, provision of liquidity to distressed banks or secondary market price support — and find that they have quite different welfare implications. 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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File URL: http://www.eief.it/files/2012/09/wp-07-securitization-transparency-and-liquidity.pdf
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Bibliographic Info

Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 0907.

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Length: 64 pages
Date of creation: 2009
Date of revision: Feb 2012
Handle: RePEc:eie:wpaper:0907

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References

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  1. Patrick Bolton & Xavier Freixas & Joel Shapiro, 2010. "The credit ratings game," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 1221, Department of Economics and Business, Universitat Pompeu Fabra.
  2. 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, Elsevier, vol. 14(1), pages 71-100, March.
  3. Anand Mohan Goel, 2003. "Why Do Firms Smooth Earnings?," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 76(1), pages 151-192, January.
  4. Gary Gorton, 2008. "The Panic of 2007," Yale School of Management Working Papers, Yale School of Management amz2372, Yale School of Management.
  5. Boot, Arnoud W A & Thakor, Anjan V, 1993. " Security Design," Journal of Finance, American Finance Association, American Finance Association, vol. 48(4), pages 1349-78, September.
  6. Joshua D. Coval & Jakub W. Jurek & Erik Stafford, 2009. "Economic Catastrophe Bonds," American Economic Review, American Economic Association, American Economic Association, vol. 99(3), pages 628-66, June.
  7. Emmanuel Farhi & Josh Lerner & Jean Tirole, 2008. "Fear of Rejection? Tiered Certification and Transparency," NBER Working Papers 14457, National Bureau of Economic Research, Inc.
  8. Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, Elsevier, vol. 15(1-2), pages 187-212.
  9. Adam Ashcraft & Paul Goldsmith-Pinkham & James Vickery, 2010. "MBS ratings and the mortgage credit boom," Staff Reports, Federal Reserve Bank of New York 449, Federal Reserve Bank of New York.
  10. Gorton, Gary B., 2008. "The panic of 2007," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 131-262.
  11. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity, monetary policy, and financial cycles," Current Issues in Economics and Finance, Federal Reserve Bank of New York, Federal Reserve Bank of New York, vol. 14(Jan).
  12. Benveniste, Lawrence M. & Spindt, Paul A., 1989. "How investment bankers determine the offer price and allocation of new issues," Journal of Financial Economics, Elsevier, Elsevier, vol. 24(2), pages 343-361.
  13. Markus K. Brunnermeier, 2008. "Deciphering the Liquidity and Credit Crunch 2007-08," NBER Working Papers 14612, National Bureau of Economic Research, Inc.
  14. Gorton, Gary & Pennacchi, George, 1990. " Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, American Finance Association, vol. 45(1), pages 49-71, March.
  15. Peter M. DeMarzo, 2005. "The Pooling and Tranching of Securities: A Model of Informed Intermediation," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 18(1), pages 1-35.
  16. Kashyap, Anil K. & Rajan, Raghuram G. & Stein, Jeremy C., 2008. "Rethinking capital regulation," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 431-471.
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Cited by:
  1. Patrick Bolton & Xavier Freixas & Joel Shapiro, 2010. "The Credit Ratings Game," Working Papers 468, Barcelona Graduate School of Economics.
  2. Hanson, Samuel G. & Sunderam, Adi, 2013. "Are there too many safe securities? Securitization and the incentives for information production," Journal of Financial Economics, Elsevier, Elsevier, vol. 108(3), pages 565-584.
  3. Sarkisyan, Anna & Casu, Barbara, 2013. "Retained interests in securitisations and implications for bank solvency," Working Paper Series, European Central Bank 1538, European Central Bank.
  4. Edmans, Alex & Heinle, Mirko & Huang, Chong, 2013. "The Real Costs of Disclosure," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9637, C.E.P.R. Discussion Papers.
  5. Riachi, Ilham & Schwienbacher, Armin, 2013. "Securitization of corporate assets and executive compensation," Journal of Corporate Finance, Elsevier, Elsevier, vol. 21(C), pages 235-251.
  6. Bar-Isaac, Heski & Shapiro, Joel, 2010. "Ratings Quality over the Business Cycle," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8156, C.E.P.R. Discussion Papers.
  7. Jeon, Doh-Shin & Lovo, Stefano, 2013. "Credit rating industry: A helicopter tour of stylized facts and recent theories," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 31(5), pages 643-651.
  8. Nadauld, Taylor D. & Sherlund, Shane M., 2009. "The Role of the Securitization Process in the Expansion of Subprime Credit," Working Paper Series, Ohio State University, Charles A. Dice Center for Research in Financial Economics 2009-9, Ohio State University, Charles A. Dice Center for Research in Financial Economics.

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