Asymmetric Information and the Death of ABS CDOs

Beltran, Daniel O.; Cordell, Lawrence R.; Thomas, Charles P.

doi:10.2139/ssrn.2245216

Cited by 5 publications

(2 citation statements)

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“…18 Rating agencies gave low risk ratings in part because the loan pools were diversified (Vinokurova 2011). See Beltran, Cordell and Thomas (2013) for the role of rating agencies and asymmetric information in the development of Collateralized Debt Obligations (CDOs), derivatives that increase the supply of credit. 19 See .…”

Section: Resultsmentioning

confidence: 99%

The Market Structure of Securitisation and the US Housing Bubble

Wächter

2014

Natl. Inst. econ. rev.

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Housing finance and, specifically, the subprime private label securitisation market in the US, was at the epicentre of the global financial crisis. Excessive debt expansion in the run-up to the crisis resulted in credit risk, under-identified and mispriced ex ante, and in systemic risk. This paper considers the role of financial innovation in debt markets and the changing market structure of securitisation in the evolution of the US housing price bubble. New financing vehicles contributed to growing risk, but the more salient factor was the change in the structure of securitisation, which led to unsustainable levels of debt. AbstractHousing finance, and, specifically, the subprime private label securitisation market in the US, was at the epicentre of the global financial crisis. Excessive debt expansion in the run-up to the crisis resulted in credit risk, under-identified and mispriced ex ante, and in systemic risk. This paper considers the role of financial innovation in debt markets and the changing market structure of securitisation in the evolution of the US housing price bubble. New financing vehicles contributed to growing risk, but the more salient factor was the change in the structure of securitisation, which led to unsustainable levels of debt.

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Section: Resultsmentioning

confidence: 99%

The Market Structure of Securitisation and the US Housing Bubble

Wächter

2014

Natl. Inst. econ. rev.

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“…7 BBB tranches of Home Equity Bonds were an important part of the CDO machine that transformed subprime mortgages into AAA-rated bonds. 8 Beltran , Cordell, and Thomas (2017) provide a methodology to calculate the intrinsic value of a CDO and apply it to market data (see their Appendix A). They attribute the low prices to the increase in information asymmetry between buyers and sellers who followed the downgrades of MBS securities by rating agencies in summer 2007.…”

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confidence: 99%

Shorting in Speculative Markets

Nutz¹,

Scheinkman²

2020

The Journal of Finance

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In models of trading with heterogeneous beliefs following Harrison‐Kreps, short selling is prohibited and agents face constant marginal costs‐of‐carry. The resale option guarantees that prices exceed buy‐and‐hold prices and the difference is identified as a bubble. We propose a model where risk‐neutral agents face asymmetric increasing marginal costs on long and short positions. Here, agents also value an option to delay, and a Hamilton‐Jacobi‐Bellman equation quantifies the influence of costs on prices. An unexpected decrease in shorting costs may deflate a bubble, linking financial innovations that facilitated shorting of mortgage‐backed securities to the collapse of prices.

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Transparency in the Mortgage Market

Pavlov

Wächter

2015

J Financ Serv Res

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This paper studies the impact of transparency in the mortgage market on the underlying real estate market. We show that geographic transparency in the secondary mortgage market, which implies geographic risk based pricing in the primary market, can limit risk-sharing and make house prices more volatile. Ex ante, regions prefer opaque markets to enable insurance opportunities. We discuss the implications for risk based pricing and house price volatility more generally. In addition, we investigate the specific conditions under which competitive lenders would optimally choose to provide opaque lending, thus reducing volatility in the real estate market. We show that in general the opaque competitive equilibrium is not stable, and lenders have incentive to switch to transparent lending if one of the geographic regions has experienced a negative income shock. We propose market and regulatory mechanisms that make the opaque competitive equilibrium stable and insurance opportunities possible. AbstractThis paper studies the impact of transparency in the mortgage market on the underlying real estate markets. We show that geographic transparency in the secondary mortgage market, which implies geographic risk based pricing in the primary market, can limit risk-sharing and make house prices more volatile. Ex-ante, regions prefer opaque markets to enable insurance opportunities. We discuss the implications for risk based pricing and house price volatility more generally.In addition, we investigate the specific conditions under which competitive lenders would optimally choose to provide opaque lending, thus reducing volatility in the real estate markets. We show that in general the opaque competitive equilibrium is not stable, and lenders have incentives to switch to transparent lending if one of the geographic regions has experienced a negative income shock. We propose market and regulatory mechanisms that make the opaque competitive equilibrium stable and insurance opportunities possible.

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Asymmetric Information and the Death of ABS CDOs

Cited by 5 publications

References 20 publications

The Market Structure of Securitisation and the US Housing Bubble

The Market Structure of Securitisation and the US Housing Bubble

Shorting in Speculative Markets

Transparency in the Mortgage Market

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