Security design with interim public information

Andre Stenzel

Journal of Mathematical Economics, 2018, vol. 76, issue C, 113-130

Abstract: We consider a security design problem where public information about the security’s underlying cash-flow arrives between trading periods. The optimal security minimizes less-than-full realization of gains from trade due to limited cash in the market, which may depend on the interim information. We show that the optimal security can be expressed as a convex combination of securities solving minimization problems for which the solutions share many debt-like features but exhibit endogenous tranching. We provide conditions for the non-optimality of standard debt contracts and show that implementation of the class of optimal securities can be achieved by mezzanine tranche retention, providing a public information rationale for departure from the pecking order.

Keywords: Security design; Public information arrival; Tranching; Pecking order (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:76:y:2018:i:c:p:113-130

DOI: 10.1016/j.jmateco.2018.02.005

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