Adverse Selection Dynamics in Privately-Produced Safe Debt Markets

Nathan Foley-Fisher, Gary Gorton and Stephane Verani

No 2020-088, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Privately-produced safe debt is designed so that there is no adverse selection in trade. This is because no agent finds it profitable to produce private information about the debt’s backing and all agents know this (i.e., it is information-insensitive). But in some macro states, it becomes profitable for some agents to produce private information, and then the debt faces adverse selection when traded (i.e., it becomes information-sensitive). We empirically study these adverse selection dynamics in a very important asset class, collateralized loan obligations, a large symbiotic appendage of the regulated banking system, which finances loans to below investmentgrade firms.

Keywords: Safe debt; Adverse selection; Information sensitivity; Collateralized loan obligations (search for similar items in EconPapers)
JEL-codes: E44 G14 G23 (search for similar items in EconPapers)
Pages: 60 p.
Date: 2020-10-23
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (1)

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https://www.federalreserve.gov/econres/feds/files/2020088r1pap.pdf (application/pdf)

Related works:
Journal Article: Adverse Selection Dynamics in Privately Produced Safe Debt Markets (2024)
Working Paper: Adverse Selection Dynamics in Privately-Produced Safe Debt Markets (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2020-88

DOI: 10.17016/FEDS.2020.088r1

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