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Complexity in Structured Finance

Author

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

Abstract

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," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(2), pages 694-722.
    • Handle: RePEc:oup:restud:v:86:y:2019:i:2:p:694-722.
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    File URL: http://hdl.handle.net/10.1093/restud/rdx071
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    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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