Securitization and Real Investment in Incomplete Markets
We study the impact of financial innovations on real investment decisions within the framework of an incomplete market economy comprised of firms, investors, and an intermediary. The firms face unique investment opportunities that arise in their business operations and can be undertaken at given reservation prices. The cash flows thus generated are not spanned by the securities traded in the financial market and cannot be valued uniquely. The intermediary purchases claims against these cash flows, pools them together, and sells tranches of primary or secondary securities to the investors. We derive necessary and sufficient conditions under which projects are undertaken due to the intermediary's actions, and firms are amenable to the pool proposed by the intermediary, compared to the no-investment option or the option of forming alternative pools. We also determine the structure of the new securities created by the intermediary and identify how it exploits the arbitrage opportunities available in the market. Our results have implications for valuation of real investments, synergies among them, and their financing mechanisms. We illustrate these implications using an example of inventory decisions under random demand. This paper was accepted by John Birge, focused issue editor.
Volume (Year): 57 (2011)
Issue (Month): 12 (December)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
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.:
- Shanken, Jay, 1992. " The Current State of the Arbitrage Pricing Theory," Journal of Finance, American Finance Association, vol. 47(4), pages 1569-1574, September.
- Hansen, Lars Peter & Jagannathan, Ravi, 1991.
"Implications of Security Market Data for Models of Dynamic Economies,"
Journal of Political Economy,
University of Chicago Press, vol. 99(2), pages 225-262, April.
- Lars Peter Hansen & Ravi Jagannathan, 1990. "Implications of Security Market Data for Models of Dynamic Economies," NBER Technical Working Papers 0089, National Bureau of Economic Research, Inc.
- Lars Peter Hansen & Ravi Jagannathan, 1990. "Implications of security market data for models of dynamic economies," Discussion Paper / Institute for Empirical Macroeconomics 29, Federal Reserve Bank of Minneapolis.
- Ritchken, Peter H & Kuo, Shyanjaw, 1988. " Option Bounds with Finite Revision Opportunities," Journal of Finance, American Finance Association, vol. 43(2), pages 301-308, June.
- Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
- Mayers, David, 1976. "Nonmarketable Assets, Market Segmentation, and the Level of Asset Prices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 11(01), pages 1-12, March.
- Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-387, May.
- Hayne E. Leland and David H. Pyle., 1976. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Research Program in Finance Working Papers 41, University of California at Berkeley.
- Allen, Franklin & Gale, Douglas, 1991. "Arbitrage, Short Sales, and Financial Innovation," Econometrica, Econometric Society, vol. 59(4), pages 1041-1068, July.
- Franklin Allen & Douglas Gale, "undated". "Arbitrage, Short Sales and Financial Innovation," Rodney L. White Center for Financial Research Working Papers 10-89, Wharton School Rodney L. White Center for Financial Research.
- Gary B. Gorton & Nicholas S. Souleles, 2007. "Special Purpose Vehicles and Securitization," NBER Chapters, in: The Risks of Financial Institutions, pages 549-602 National Bureau of Economic Research, Inc.
- Gary Gorton & Nicholas S. Souleles, 2005. "Special purpose vehicles and securitization," Working Papers 05-21, Federal Reserve Bank of Philadelphia.
- Gary Gorton & Nicholas Souleles, 2005. "Special Purpose Vehicles and Securitization," NBER Working Papers 11190, National Bureau of Economic Research, Inc.
- Peter DeMarzo & Darrell Duffie, 1999. "A Liquidity-Based Model of Security Design," Econometrica, Econometric Society, vol. 67(1), pages 65-100, January.
- Levy, Haim, 1985. " Upper and Lower Bounds of Put and Call Option Value: Stochastic Dominance Approach," Journal of Finance, American Finance Association, vol. 40(4), pages 1197-1217, September.
- Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
- Mayers, David, 1973. "Nonmarketable Assets and the Determination of Capital Asset Prices in the Absence of a Riskless Asset," The Journal of Business, University of Chicago Press, vol. 46(2), pages 258-267, April.
- Kamlesh Mathur & Peter Ritchken, 1999. "Minimum option prices under decreasing absolute risk aversion," Review of Derivatives Research, Springer, vol. 3(2), pages 135-156, May.
- Glaeser, Edward L. & Kallal, Hedi D., 1997. "Thin Markets, Asymmetric Information, and Mortgage-Backed Securities," Journal of Financial Intermediation, Elsevier, vol. 6(1), pages 64-86, January.
- Weil, Philippe, 1994. "Nontraded assets and the CAPM," European Economic Review, Elsevier, vol. 38(3-4), pages 913-922, April.
- Perrakis, Stylianos & Ryan, Peter J, 1984. " Option Pricing Bounds in Discrete Time," Journal of Finance, American Finance Association, vol. 39(2), pages 519-525, June.
- Steinar Ekern & Robert Wilson, 1974. "On the Theory of the Firm in an Economy with Incomplete Markets," Bell Journal of Economics, The RAND Corporation, vol. 5(1), pages 171-180, Spring.
- Peter M. DeMarzo, 2005. "The Pooling and Tranching of Securities: A Model of Informed Intermediation," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 1-35.
- Gorton, Gary & Pennacchi, George, 1990. " Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, vol. 45(1), pages 49-71, March.
- Vishal Gaur & Sridhar Seshadri, 2005. "Hedging Inventory Risk Through Market Instruments," Manufacturing & Service Operations Management, INFORMS, vol. 7(2), pages 103-120, April.
- Ritchken, Peter H, 1985. " On Option Pricing Bounds," Journal of Finance, American Finance Association, vol. 40(4), pages 1219-1233, September.
- Bruce Kogut & Nalin Kulatilaka, 1994. "Operating Flexibility, Global Manufacturing, and the Option Value of a Multinational Network," Management Science, INFORMS, vol. 40(1), pages 123-139, January.
- John A. Buzacott & Rachel Q. Zhang, 2004. "Inventory Management with Asset-Based Financing," Management Science, INFORMS, vol. 50(9), pages 1274-1292, September.
- John R. Birge, 2000. "Option Methods for Incorporating Risk into Linear Capacity Planning Models," Manufacturing & Service Operations Management, INFORMS, vol. 2(1), pages 19-31, August. Full references (including those not matched with items on IDEAS)