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Equilibrium Securitization with Diverse Beliefs

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  • Zhang, Shengxing
  • Ellis, Andrew
  • Piccione, Michele

Abstract

We study the effects of diverse beliefs on equilibrium securitization under risk neutrality. We provide a simple characterization of the optimal securities. Pooling and tranching of assets emerges in equilibrium as a consequence of the traders’ diverse beliefs about asset returns. The issuer of securities tranches the asset pool, and traders sort among the tranches according to their beliefs. We show how the traders’ disagreement about the correlation of asset returns is a key factor in determining which assets are pooled.

Suggested Citation

  • Zhang, Shengxing & Ellis, Andrew & Piccione, Michele, 2021. "Equilibrium Securitization with Diverse Beliefs," CEPR Discussion Papers 16091, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16091
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    Cited by:

    1. is not listed on IDEAS
    2. Alex Gershkov & Benny Moldovanu & Philipp Strack & Mengxi Zhang, 2024. "Optimal Security Design for Risk-Averse Investors," ECONtribute Discussion Papers Series 325, University of Bonn and University of Cologne, Germany.

    More about this item

    Keywords

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    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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