Securitization bubbles: Structured finance with disagreement about default risk

Tobias Broer
Additional contact information
Tobias Broer: Stockholm University, CEPR - Center for Economic Policy Research

Post-Print from HAL

Abstract: An additional reason for the structured finance boom of the 2000s may have been disagreement about default risk of collateral assets. When risk-neutral investors disagree about average default probabilities, structuring collateral cash flow raises prices by concentrating optimists' demand on risky tranches. With disagreement about default correlation, low-correlation investors believe in diversification and pay high prices for senior tranches they deem riskless. High-correlation investors value junior tranches they expect to pay whenever aggregate conditions are good. Risk aversion and short selling through credit default swaps reduce the prices of both pass-through and structured securitizations but may increase the return to tranching.

Date: 2018-03
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Published in Journal of Financial Economics, 2018, 127 (3), pp.505-518. ⟨10.1016/j.jfineco.2017.12.001⟩

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
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:hal:journl:hal-04489676

DOI: 10.1016/j.jfineco.2017.12.001

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().