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Securitization, Transparency, and Liquidity

  • Marco Pagano
  • Paolo Volpin

We present a model in which issuers of asset-backed securities choose to release coarse information to enhance the liquidity of their primary market, at the cost of reducing secondary market liquidity. The degree of transparency is inefficiently low if the social value of secondary market liquidity exceeds its private value. We show that various types of public intervention (mandatory transparency standards, provision of liquidity to distressed banks, or secondary market price support) have quite different welfare implications. Finally, we extend the model by endogenizing the private and social value of liquidity and the proportion of sophisticated investors. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please e-mail: journals.permissions@oup.com ., Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/rfs/hhs074
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Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 25 (2012)
Issue (Month): 8 ()
Pages: 2417-2453

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Handle: RePEc:oup:rfinst:v:25:y:2012:i:8:p:2417-2453
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  1. Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 187-212.
  2. 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.
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  12. Joshua D. Coval & Jakub W. Jurek & Erik Stafford, 2009. "Economic Catastrophe Bonds," American Economic Review, American Economic Association, vol. 99(3), pages 628-66, June.
  13. Kashyap, Anil K. & Rajan, Raghuram G. & Stein, Jeremy C., 2008. "Rethinking capital regulation," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 431-471.
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