Equilibrium Securitization with Diverse Beliefs

Shengxing Zhang, Andrew Ellis and Michele Piccione

No 16091, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the effects of diverse beliefs on equilibrium securitization under risk neutrality. We provide a simple characterization of the optimal securities. Pooling and tranching of assets emerges in equilibrium as a consequence of the traders’ diverse beliefs about asset returns. The issuer of securities tranches the asset pool, and traders sort among the tranches according to their beliefs. We show how the traders’ disagreement about the correlation of asset returns is a key factor in determining which assets are pooled.

Keywords: Securitization; Heterogeneous beliefs; Collateral; Tranching; Pooling (search for similar items in EconPapers)
JEL-codes: D53 G20 (search for similar items in EconPapers)
Date: 2021-04
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