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Private Information in the Mortgage Market: Evidence and a Theory of Crises

In: Macroeconomic and Financial Stability: challenges for Monetary Policy

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  • Robert Shimer

    (University of Chicago)

Abstract

A growing body of evidence suggests that private information is important in the mortgage-backed securities market. Recent research reconsiders the theory of how investors trade in the presence of private information. This paper summarizes the evidence and uses the new theoretical approach to explain how trade in mortgage-backed securities can collapse during a crisis.
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Suggested Citation

  • Robert Shimer, 2014. "Private Information in the Mortgage Market: Evidence and a Theory of Crises," Central Banking, Analysis, and Economic Policies Book Series, in: Sofía Bauducco & Lawrence Christiano & Claudio Raddatz (ed.),Macroeconomic and Financial Stability: challenges for Monetary Policy, edition 1, volume 19, chapter 4, pages 117-150, Central Bank of Chile.
    • Handle: RePEc:chb:bcchsb:v19c04pp117-150
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    References listed on IDEAS

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    1. Cem Demiroglu & Christopher James, 2012. "How Important is Having Skin in the Game? Originator-Sponsor Affiliation and Losses on Mortgage-backed Securities," The Review of Financial Studies, Society for Financial Studies, vol. 25(11), pages 3217-3258.
    2. Christopher L. Foote & Kristopher Gerardi & Paul S. Willen, 2012. "Why did so many people make so many ex post bad decisions? the causes of the foreclosure crisis," FRB Atlanta Working Paper 2012-07, Federal Reserve Bank of Atlanta.
    3. John Krainer & Elizabeth Laderman, 2014. "Mortgage Loan Securitization and Relative Loan Performance," Journal of Financial Services Research, Springer;Western Finance Association, vol. 45(1), pages 39-66, February.
    4. Peter DeMarzo & Darrell Duffie, 1999. "A Liquidity-Based Model of Security Design," Econometrica, Econometric Society, vol. 67(1), pages 65-100, January.
    5. Douglas Gale, 1996. "Equilibria and Pareto optima of markets with adverse selection (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(2), pages 207-235.
    6. Chris Downing & Dwight Jaffee, 2009. "Is the Market for Mortgage-Backed Securities a Market for Lemons?," The Review of Financial Studies, Society for Financial Studies, vol. 22(7), pages 2257-2294, July.
    7. Tomasz Piskorski & Amit Seru & James Witkin, 2015. "Asset Quality Misrepresentation by Financial Intermediaries: Evidence from the RMBS Market," Journal of Finance, American Finance Association, vol. 70(6), pages 2635-2678, December.
    8. Milgrom, Paul & Stokey, Nancy, 1982. "Information, trade and common knowledge," Journal of Economic Theory, Elsevier, vol. 26(1), pages 17-27, February.
    9. Gorton, Gary & Pennacchi, George, 1990. "Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, vol. 45(1), pages 49-71, March.
    10. 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, President and Fellows of Harvard College, vol. 125(1), pages 307-362.
    11. Michael Spence, 1973. "Job Market Signaling," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 87(3), pages 355-374.
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    Citations

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    Cited by:

    1. Salomón García, 2022. "Mortgage securitization and information frictions in general equilibrium," Working Papers 2221, Banco de España.
    2. Robert E. Hall, 2014. "Trade with Asymmetric Information," Central Banking, Analysis, and Economic Policies Book Series, in: Sofía Bauducco & Lawrence Christiano & Claudio Raddatz (ed.),Macroeconomic and Financial Stability: challenges for Monetary Policy, edition 1, volume 19, chapter 5, pages 151-160, Central Bank of Chile.
    3. Garcia-Villegas, Salomon, 2023. "The amplification effects of adverse selection in mortgage credit supply," Journal of Housing Economics, Elsevier, vol. 62(C).

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