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Complexity in Structured Finance


  • Andra C Ghent
  • Walter N Torous
  • Rossen I Valkanov


We study complexity in the market for securitized products, a market at the heart of the financial crisis of 2007–9. The complexity of these products rose substantially in the years preceding the financial crisis. We find that securities in more complex deals default more and have lower realized returns. The worse performance is economically meaningful: a one standard deviation increase in complexity represents an 18% increase in default on AAA securities. However, yields of more complex securities are not higher indicating that investors did not perceive them as riskier. Our results are consistent with complexity obfuscating security quality.

Suggested Citation

  • Andra C Ghent & Walter N Torous & Rossen I Valkanov, 2019. "Complexity in Structured Finance," Review of Economic Studies, Oxford University Press, vol. 86(2), pages 694-722.
  • Handle: RePEc:oup:restud:v:86:y:2019:i:2:p:694-722.

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    Cited by:

    1. Dennis Vink & Mike Nawas & Vivian van Breemen, 2019. "Security design and credit rating risk in the CLO market," DNB Working Papers 643, Netherlands Central Bank, Research Department.
    2. Daniel Stein & Jeremy Tobacman, 2016. "Weather Insurance Savings Accounts," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 41(4), pages 677-700, October.
    3. Limbach, Peter & Rau, P. Raghavendra & Schürmann, Henrik, 2020. "The Death of Trust Across the U.S. Finance Industry," CFR Working Papers 20-05, University of Cologne, Centre for Financial Research (CFR).
    4. Basu, Anup K. & Dulleck, Uwe, 2020. "Why do (some) consumers purchase complex financial products? An experimental study on investment in hybrid securities," Economic Analysis and Policy, Elsevier, vol. 67(C), pages 203-220.
    5. Jess N. Cornaggia & Kimberly J. Cornaggia & Ryan D. Israelsen, 2020. "Where the Heart Is: Information Production and the Home Bias," Management Science, INFORMS, vol. 66(12), pages 5532-5557, December.

    More about this item


    Complexity; Security design; MBS performance;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage


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