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Complexity in Structured Finance: Financial Wizardry or Smoke and Mirrors

Author

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  • Rossen Valkanov

    (University of California, San Diego)

  • Andra Ghent

    (Arizona State University)

Abstract

We use data from prospectus supplements to create measures of the complexity of securitized products. We use these measures to investigate whether and to what extent complexity plays a role in the performance and pricing of mortgage-backed securities. We find that securities in more complex deals default more. However, yields of more complex securities are not higher at issuance indicating that investors do not perceive such assets as more likely to default. Furthermore, rating agencies are more lenient in rating complex deals. Our results indicate that issuers use complexity as a sales device rather than to create higher quality assets.

Suggested Citation

  • Rossen Valkanov & Andra Ghent, 2014. "Complexity in Structured Finance: Financial Wizardry or Smoke and Mirrors," 2014 Meeting Papers 104, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:104
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    Cited by:

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    2. Xudong An & Yongheng Deng & Joseph Nichols & Anthony Sanders, 2015. "What is Subordination About? Credit Risk and Subordination Levels in Commercial Mortgage-backed Securities (CMBS)," The Journal of Real Estate Finance and Economics, Springer, vol. 51(2), pages 231-253, August.
    3. Chen, Zhizhen & Liu, Frank Hong & Opong, Kwaku & Zhou, Mingming, 2017. "Short-term safety or long-term failure? Empirical evidence of the impact of securitization on bank risk," Journal of International Money and Finance, Elsevier, vol. 72(C), pages 48-74.
    4. Marco Bardoscia & Daniele d'Arienzo & Matteo Marsili & Valerio Volpati, 2019. "Lost in Diversification," Papers 1901.09795, arXiv.org.
    5. Arnold, Marc & Schuette, Dustin & Wagner, Alexander, 2014. "Neglected Risk: Evidence from Structured Product Counterparty Exposure," Working Papers on Finance 1406, University of St. Gallen, School of Finance, revised Apr 2016.
    6. Sareh Pouryousefi & Jeff Frooman, 2019. "The Consumer Scam: An Agency-Theoretic Approach," Journal of Business Ethics, Springer, vol. 154(1), pages 1-12, January.

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