Collateralization and asset price bubbles when investors disagree about risk

Tobias Broer () and Afroditi Kero
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Tobias Broer: PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, Stockholm University, CEPR - Center for Economic Policy Research
Afroditi Kero: Neapolis University

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Abstract: Survey respondents disagree strongly about the dispersion of future returns and, increasingly, macroeconomic uncertainty. Such disagreement about risk may raise asset prices when collateralized debt products allow investors to realize perceived gains from trade. Investors who expect low volatility in collateral cash-flow appreciate senior debt as riskless. Those who expect high volatility, in contrast, value the upside potential in junior debt or equity claims. We show how such self-selection may have had a sizeable effect on the prices of RMBS and CDOs before the crisis, as investors disagreed about the volatility of aggregate economic conditions and their importance for default rates in collateral pools.

Keywords: Asset prices; Heterogeneous beliefs; Disagreement; Volatility; Securitization; Structured finance; Bubbles (search for similar items in EconPapers)
Date: 2021-07
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Published in Journal of Banking and Finance, 2021, 128, ⟨10.1016/j.jbankfin.2021.106137⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04459549

DOI: 10.1016/j.jbankfin.2021.106137

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