Complexity in Structured Finance

Andra Ghent, Walter N Torous and Rossen I Valkanov

The Review of Economic Studies, 2019, vol. 86, issue 2, 694-722

Abstract: We study complexity in the market for securitized products, a market at the heart of the financial crisis of 2007–9. The complexity of these products rose substantially in the years preceding the financial crisis. We find that securities in more complex deals default more and have lower realized returns. The worse performance is economically meaningful: a one standard deviation increase in complexity represents an 18% increase in default on AAA securities. However, yields of more complex securities are not higher indicating that investors did not perceive them as riskier. Our results are consistent with complexity obfuscating security quality.

Keywords: Complexity; Security design; MBS performance (search for similar items in EconPapers)
JEL-codes: G12 G14 G21 G24 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (21)

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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:86:y:2019:i:2:p:694-722.

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