Adverse Selection Dynamics in Privately Produced Safe Debt Markets

Nathan Foley-Fisher, Gary Gorton and Stephane Verani

American Economic Journal: Macroeconomics, 2024, vol. 16, issue 1, 441-68

Abstract: Privately produced safe debt is designed so that there is no adverse selection in trade. But in some macro states—here, the onset of the pandemic—it becomes profitable for some agents to produce private information, and then agents face adverse selection when they trade the debt (i.e., it becomes information sensitive). We empirically study these adverse selection dynamics in a very important asset class, collateralized loan obligations (CLOs), which finance loans to below-investment-grade firms. We decompose the bid-ask spreads on the AAA bonds of CLOs into a component reflecting dealer bank balance sheet costs and the adverse selection component.

JEL-codes: D22 D82 E44 G12 G14 G32 (search for similar items in EconPapers)
Date: 2024
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Related works:
Working Paper: Adverse Selection Dynamics in Privately-Produced Safe Debt Markets (2020)
Working Paper: Adverse Selection Dynamics in Privately-Produced Safe Debt Markets (2020)
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DOI: 10.1257/mac.20210383

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