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Dynamic Asset-Backed Security Design

Author

Listed:
  • Emre Ozdenoren
  • Kathy Yuan
  • Shengxing Zhang

Abstract

Borrowers obtain liquidity by issuing securities backed by the current period payoff and resale price of a long-lived collateral asset, and they are privately informed about the payoff distribution. Asset price can be self-fulfilling: a higher asset price lowers adverse selection and allows borrowers to raise greater funding, which makes the asset more valuable, leading to multiple equilibria. Optimal security design eliminates multiple equilibria, improves welfare, and can be implemented as a repo contract. Persistent adverse selection lowers debt funding, generates volatility in asset prices, and exacerbates credit crunches. The theory demonstrates the role of asset-backed securities on stability of market-based financial systems.

Suggested Citation

  • Emre Ozdenoren & Kathy Yuan & Shengxing Zhang, 2023. "Dynamic Asset-Backed Security Design," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(6), pages 3282-3314.
    • Handle: RePEc:oup:restud:v:90:y:2023:i:6:p:3282-3314.
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    File URL: http://hdl.handle.net/10.1093/restud/rdad022
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    Cited by:

    1. Piao, Xiaorui & Mei, Bin, 2025. "On the corporate performance of issuers of various green assets," Finance Research Letters, Elsevier, vol. 78(C).

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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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