Complexity in Structured Finance: Financial Wizardry or Smoke and Mirrors

Rossen Valkanov and Andra Ghent

No 104, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: We use data from prospectus supplements to create measures of the complexity of securitized products. We use these measures to investigate whether and to what extent complexity plays a role in the performance and pricing of mortgage-backed securities. We find that securities in more complex deals default more. However, yields of more complex securities are not higher at issuance indicating that investors do not perceive such assets as more likely to default. Furthermore, rating agencies are more lenient in rating complex deals. Our results indicate that issuers use complexity as a sales device rather than to create higher quality assets.

Date: 2014
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