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Securitization, Transparency and Liquidity

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Abstract

We present a model in which issuers of asset backed securities choose to release coarse information 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 — mandatory transparency standards, provision of liquidity to distressed banks or secondary market price support — and find that they have quite different welfare implications. 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

  • Marco Pagano & Paolo Volpin, 2008. "Securitization, Transparency and Liquidity," CSEF Working Papers 210, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 31 Jul 2010.
  • Handle: RePEc:sef:csefwp:210
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    References listed on IDEAS

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    More about this item

    Keywords

    securitization; transparency; liquidity; rating; subprime; crisis; default;

    JEL classification:

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

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