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Security design in non-exclusive markets with asymmetric information

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Abstract

We study the problem of a seller (e.g. a bank) who is privately informed about the quality of her asset and needs to raise funds from uninformed buyers (e.g. investors) by issuing securities backed by her asset cash flows. In our setting, buyers post menus of contracts to screen the seller, but the seller cannot commit to trade with only one buyer, i.e., markets are non-exclusive. Non-exclusive markets behave very differently from exclusive ones: (i) separating contracts are never part of equilibrium; (ii) mispricing of claims is always larger than in exclusive markets; (iii) there is always a semi-pooling equilibrium where all sellers issue the same debt contract priced at average-valuation, and sellers of low-quality assets issue remaining cash flows at low-valuation; (iv) market liquidity can be higher or lower than in exclusive markets, but (v) the average quality of originated assets is always lower. Our model's predictions are consistent with empirical evidence on issuance and pricing of mortgage-backed securities, and we use the theory to evaluate recent reforms aimed at enhancing transparency and exclusivity in markets.

Suggested Citation

  • Vladimir Asriyan & Victoria Vanasco, 2019. "Security design in non-exclusive markets with asymmetric information," Economics Working Papers 1712, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2021.
  • Handle: RePEc:upf:upfgen:1712
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    1. Vladimir Asriyan & William Fuchs & Brett Green, 2017. "Information Spillovers in Asset Markets with Correlated Values," American Economic Review, American Economic Association, vol. 107(7), pages 2007-2040, July.
    2. Laurence Ales & Pricila Maziero, "undated". "Non-exclusive Dynamic Contracts, Competition, and the Limits of Insurance," GSIA Working Papers 2010-E59, Carnegie Mellon University, Tepper School of Business.
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    4. Peter DeMarzo & Darrell Duffie, 1999. "A Liquidity-Based Model of Security Design," Econometrica, Econometric Society, vol. 67(1), pages 65-100, January.
    5. Fukui, Masao, 2018. "Asset Quality Cycles," Journal of Monetary Economics, Elsevier, vol. 95(C), pages 97-108.
    6. Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, Oxford University Press, vol. 125(1), pages 307-362.
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    More about this item

    Keywords

    adverse slection; security design; non-exclusivity; tranching; liquidity; securitization; transparency; opacity; complexity; market design; regulation;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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