Adverse Selection Dynamics in Privately-Produced Safe Debt Markets

Nathan Foley-Fisher, Gary Gorton and Stephane Verani

No 28016, NBER Working Papers from National Bureau of Economic Research, Inc

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 investment-grade firms.

JEL-codes: E44 G14 G23 (search for similar items in EconPapers)
Date: 2020-10
New Economics Papers: this item is included in nep-mac and nep-ore
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Published as Nathan Foley-Fisher & Gary Gorton & Stéphane Verani, 2024. "Adverse Selection Dynamics in Privately Produced Safe Debt Markets," American Economic Journal: Macroeconomics, vol 16(1), pages 441-468.

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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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