Dynamic asset-backed security design

Emre Ozdenoren, Kathy Yuan and Shengxing Zhang

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

Abstract: Borrowers obtain liquidity by issuing securities backed by current period payoff and resale price of a long-lived collateral asset. They are privately informed about the payoff distribution. Asset price can be self-fulfilling: higher asset price lowers adverse selection, allows borrowers to raise more funding which makes the asset more valuable, leading to multiple equilibria. Optimal security design eliminates multiple equilibria, improves welfare, and can be implemented as a repo contract. Persistence in adverse selection lowers debt funding, generates volatility in asset price, and exacerbates credit crunch. The theory demonstrates the role of asset-backed securities on stability of market-based financial systems.

Keywords: liquidity; dynamic price feedback; tradable assets; inter-temporal coordination; security design; multiple equilibria; self-fulfilling prices; financial fragility; haircut; repo runds; credit crunch; asset-backed security; collateral; limited commitment; adverse selection; market-based financial intermediation (search for similar items in EconPapers)
JEL-codes: G00 G10 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2022-05-16
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://eprints.lse.ac.uk/118859/ Open access version. (application/pdf)

Related works:
Journal Article: Dynamic Asset-Backed Security Design (2023)
Working Paper: Dynamic asset-backed security design (2023)
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:118859

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 ().