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Are there too many safe securities? Securitization and the incentives for information production

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  • Hanson, Samuel G.
  • Sunderam, Adi

Abstract

We present a model that helps explain several past collapses of securitization markets. Originators issue too many informationally insensitive securities in good times, blunting investor incentives to become informed. The resulting endogenous scarcity of informed investors exacerbates primary market collapses in bad times. Inefficiency arises because informed investors are a public good from the perspective of originators. All originators benefit from the presence of additional informed investors in bad times, but each originator minimizes his reliance on costly informed capital in good times by issuing safe securities. Our model suggests regulations that limit the issuance of safe securities in good times.

Suggested Citation

  • Hanson, Samuel G. & Sunderam, Adi, 2013. "Are there too many safe securities? Securitization and the incentives for information production," Journal of Financial Economics, Elsevier, vol. 108(3), pages 565-584.
    • Handle: RePEc:eee:jfinec:v:108:y:2013:i:3:p:565-584
    DOI: 10.1016/j.jfineco.2013.02.005
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    Cited by:

    1. Nathan Foley-Fisher & Gary Gorton & Stéphane Verani, 2024. "Adverse Selection Dynamics in Privately Produced Safe Debt Markets," American Economic Journal: Macroeconomics, American Economic Association, vol. 16(1), pages 441-468, January.
    2. Mr. Ehsan Ebrahimy, 2019. "Fire Sales in Frozen Markets," IMF Working Papers 2019/092, International Monetary Fund.
    3. Chernenko, Sergey & Hanson, Samuel G. & Sunderam, Adi, 2016. "Who neglects risk? Investor experience and the credit boom," Journal of Financial Economics, Elsevier, vol. 122(2), pages 248-269.
    4. Klein, Philipp & Mössinger, Carina & Pfingsten, Andreas, 2021. "Transparency as a remedy for agency problems in securitization? The case of ECB’s loan-level reporting initiative," Journal of Financial Intermediation, Elsevier, vol. 46(C).
    5. Gary Gorton, 2020. "The Regulation of Private Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(S1), pages 21-42, October.
    6. Timothy Jackson & Laurence J. Kotlikoff, 2021. "Banks as Potentially Crooked Secret Keepers," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(7), pages 1593-1628, October.
    7. Marshall A. Geiger & Sami Keskek & Abdullah Kumas, 2022. "Trading concentration and industry-specific information: an analysis of auto complaints," Review of Quantitative Finance and Accounting, Springer, vol. 59(3), pages 913-937, October.
    8. Gary Gorton & Guillermo Ordo?ez, 2014. "Collateral Crises," American Economic Review, American Economic Association, vol. 104(2), pages 343-378, February.
    9. Efraim Benmelech & Nittai Bergman, 2018. "Debt, Information, and Illiquidity," NBER Working Papers 25054, National Bureau of Economic Research, Inc.
    10. Ammann, Manuel & Arnold, Marc & Straumann, Simon, 2017. "Illuminating the Dark Side of Financial Innovation: The Role of Investor Information," Working Papers on Finance 1704, University of St. Gallen, School of Finance.
    11. Ammann, Manuel & Arnold, Marc & Straumann, Simon, 2023. "Pricing, issuance volume, and design of innovative securities: The role of investor information," Journal of Financial Intermediation, Elsevier, vol. 55(C).
    12. Jonas Meuli & Dr. Thomas Nellen & Dr. Thomas Nitschka, 2016. "Securitisation, loan growth and bank funding: the Swiss experience since 1932," Working Papers 2016-18, Swiss National Bank.
    13. Zhou, Jing, 2022. "Collateral quality and house prices," Journal of Economic Dynamics and Control, Elsevier, vol. 145(C).
    14. Sanjiv Das & Seoyoung Kim, 2016. "The Design and Risk Management of Structured Finance Vehicles," JRFM, MDPI, vol. 9(4), pages 1-21, October.
    15. Chernenko, Sergey & Hanson, Samuel Gregory & Sunderam, Adi, 2014. "The Rise and Fall of Demand for Securitizations," Working Paper Series 2014-16, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    16. Rossen Valkanov & Andra Ghent, 2014. "Complexity in Structured Finance: Financial Wizardry or Smoke and Mirrors," 2014 Meeting Papers 104, Society for Economic Dynamics.
    17. Tri Vi Dang & Gary B. Gorton & Bengt R. Holmstrom, 2019. "The Information View of Financial Crises," NBER Working Papers 26074, National Bureau of Economic Research, Inc.
    18. Gary B. Gorton, 2019. "The Regulation of Private Money," NBER Working Papers 25891, National Bureau of Economic Research, Inc.
    19. Timmermann, Allan & Schmidt, Lawrence & , & Wermers, Russ, 2017. "Transparency, Investor Information Acquisition, and Money Market Fund Risk Rebalancing during the 2011-12 Eurozone Crisis," CEPR Discussion Papers 11895, C.E.P.R. Discussion Papers.
    20. Ebrahimy, Ehsan, 2019. "Fire-sales in frozen markets," ESRB Working Paper Series 100, European Systemic Risk Board.
    21. Mirza, Afrasiab & Stephens, Eric, 2022. "Securitization and aggregate investment efficiency," Journal of Financial Intermediation, Elsevier, vol. 52(C).

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    More about this item

    Keywords

    Securitization; Information production; Safe assets; Crisis;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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