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Securitization, Transparency and Liquidity

Author

Listed:
  • Pagano, Marco

    (Universita de Napoli Federico II and CSEF)

  • Volpin, Paolo

    (London Business School)

Abstract

We present a model in which issuers of structured bonds choose coarse and opaque ratings to enhance the liquidity of their primary market, at the cost of reducing secondary market liquidity or even causing it to freeze. The degree of transparency is inefficiently low if the social value of secondary market liquidity exceeds its private value. We analyze various types of public intervention--requiring transparency for rating agencies, providing liquidity to distressed banks or supporting secondary market prices--and find that their welfare implications are quite different. Finally, transparency is greater if issuers restrain the issue size, or tranche it so as to sell the more information-sensitive tranche to sophisticated investors only.

Suggested Citation

  • Pagano, Marco & Volpin, Paolo, 2008. "Securitization, Transparency and Liquidity," Working Papers 09-1, University of Pennsylvania, Wharton School, Weiss Center.
    • Handle: RePEc:ecl:upafin:09-1
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    File URL: http://rfs.oxfordjournals.org/content/25/8/2417.short
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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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