Security Design in Non-Exclusive Markets with Asymmetric Information
Victoria Vanasco () and
Vladimir Asriyan
No 1164, Working Papers from Barcelona School of Economics
Abstract:
We study the problem of a seller (e.g. a bank) who is privately informed about the quality of her asset and needs to raise funds from uninformed buyers (e.g. investors) by issuing securities backed by her asset cash flows. In our setting, buyers post menus of contracts to screen the seller, but the seller cannot commit to trade with only one buyer, i.e., markets are non-exclusive. Non-exclusive markets behave very differently from exclusive ones: (i) separating contracts are never part of equilibrium; (ii) mispricing of claims is always larger than in exclusive markets; (iii) there is always a semi-pooling equilibrium where all sellers issue the same debt contract priced at average-valuation, and sellers of low-quality assets issue remaining cash flows at low-valuation; (iv) market liquidity can be higher or lower than in exclusive markets, but (v) the average quality of originated assets is always lower. Our model's predictions are consistent with empirical evidence on issuance and pricing of mortgage-backed securities, and we use the theory to evaluate recent reforms aimed at enhancing transparency and exclusivity in markets.
Keywords: adverse selection; liquidity; Regulation; market design; securitization; complexity; transparency; security design; non-exclusivity; tranching (search for similar items in EconPapers)
JEL-codes: D47 D82 D86 G14 G18 (search for similar items in EconPapers)
Date: 2020-03
New Economics Papers: this item is included in nep-mic
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Related works:
Working Paper: Security design in non-exclusive markets with asymmetric information (2021) 
Working Paper: Security design in non-exclusive markets with asymmetric information (2020) 
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:1164
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