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Design of Financial Securities: Empirical Evidence from Private-Label RMBS Deals

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  • Taylor A. Begley
  • Amiyatosh Purnanandam

Abstract

We study the key drivers of security design in the residential mortgage-backed security (RMBS) market during the run-up to the subprime mortgage crisis. We show that deals with a higher level of equity tranche have a significantly lower delinquency rate conditional on observable loan characteristics. The effect is concentrated within pools with a higher likelihood of asymmetric information between deal sponsors and potential buyers of the securities. Further, securities sold from high-equity-tranche deals command higher prices conditional on their credit ratings. Overall, our results show that the goal of security design in this market was not only to exploit regulatory arbitrage, but also to mitigate information frictions that were pervasive in this market. (JEL G20, G30)Received August 26, 2014; accepted May 3, 2016, by Editor Itay Goldstein.

Suggested Citation

  • Taylor A. Begley & Amiyatosh Purnanandam, 2017. "Design of Financial Securities: Empirical Evidence from Private-Label RMBS Deals," The Review of Financial Studies, Society for Financial Studies, vol. 30(1), pages 120-161.
    • Handle: RePEc:oup:rfinst:v:30:y:2017:i:1:p:120-161.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhw056
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    More about this item

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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