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Post-crisis Signals in Securitization: Evidence from Auto ABS

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  • Elizabeth C. Klee
  • Chae Hee Shin

Abstract

We find significant evidence of asymmetric information and signaling in post-crisis offerings in the auto asset-backed securities (ABS) market. Using granular regulatory reporting data, we are able to directly measure private information and quantify its effect on signaling and pricing. We show that lenders "self-finance'' unobservably higher-quality loans by holding these loans for longer periods to signal private information. This signal is priced in initial offerings of auto ABS and accurately predicts ex-post loan performance. We also demonstrate that our results are robust to exogenous shifts in the demand and supply of auto loans. Despite an environment of post-crisis enhanced transparency and securitization standards, signaling may be motivated by inattentive investors and regulations enforcing "no adverse selection'' in constructing ABS.

Suggested Citation

  • Elizabeth C. Klee & Chae Hee Shin, 2020. "Post-crisis Signals in Securitization: Evidence from Auto ABS," Finance and Economics Discussion Series 2020-042, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2020-42
    DOI: 10.17016/FEDS.2020.042
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    File URL: https://www.federalreserve.gov/econres/feds/files/2020042pap.pdf
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    References listed on IDEAS

    as
    1. Adelino, Manuel & Gerardi, Kristopher & Hartman-Glaser, Barney, 2019. "Are lemons sold first? Dynamic signaling in the mortgage market," Journal of Financial Economics, Elsevier, vol. 132(1), pages 1-25.
    2. Agarwal, Sumit & Chang, Yan & Yavas, Abdullah, 2012. "Adverse selection in mortgage securitization," Journal of Financial Economics, Elsevier, vol. 105(3), pages 640-660.
    3. Albertazzi, Ugo & Eramo, Ginette & Gambacorta, Leonardo & Salleo, Carmelo, 2015. "Asymmetric information in securitization: An empirical assessment," Journal of Monetary Economics, Elsevier, vol. 71(C), pages 33-49.
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    More about this item

    Keywords

    Financial regulation; Securities markets; Signaling; Securitization; Asymmetric information; Auto loans;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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