Equilibrium securitization with diverse beliefs

Andrew Ellis, Michele Piccione and Shengxing Zhang

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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)
Pages: 32 pages
Date: 2022-01-01
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published in Theoretical Economics, 1, January, 2022, 17(1), pp. 121 - 152. ISSN: 1933-6837

Downloads: (external link)
http://eprints.lse.ac.uk/113728/ Open access version. (application/pdf)

Related works:
Journal Article: Equilibrium securitization with diverse beliefs (2022)
Working Paper: Equilibrium Securitization with Diverse Beliefs (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:113728

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().