Securitization Under Asymmetric Information Over the Business Cycle

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. iii Terms of use: Documents in EconStor may AbstractThis paper studies the efficiency of financial intermediation through securitization in a model with heterogeneous investment projects and asymmetric information about the quality of securitized assets. I show that when retaining part of the risk, the issuer of securitized assets may credibly signal its quality. However, in the boom stage of the business cycle this practice is inefficient, information on asset quality remains private, and lower-quality assets accumulate on balance sheets of financial intermediaries. This prolongs and deepens a subsequent recession with an intensity proportional to the length of the preceding boom. In recessions, the model also produces amplification of adverse selection problems on resale markets for securitized assets. These are especially severe after a prolonged boom period and when securitized high-quality assets are no longer traded. The model also suggests that improperly designed regulation requiring higher explicit risk retention may become counterproductive due to a negative generalequilibrium effect; i.e., it may adversely affect both the quantity and the quality of investment in the economy. JEL classification: E, E3, E32, E44, G, G0, G01, G2, G20 Bank classification: Business fluctuations and cycles; Economic models; Credit and credit aggregates; Financial markets; Financial stability; Financial system regulation and policies RésuméL'auteur étudie l'efficience de la titrisation comme moyen d'intermédiation financière à l'aide d'un modèle où sont formalisés des projets d'investissement hétérogènes et l'asymétrie de l'information sur la qualité des actifs titrisés. Il montre qu'en conservant une partie du risque, l'émetteur des actifs titrisés signale de manière crédible leur qualité. Toutefois, durant la phase d'expansion du cycle économique, cette pratique est inefficiente, l'information sur la qualité des actifs demeure privée, et des actifs de moindre qualité s'accumulent dans le bilan des intermédiaires financiers. Cela prolonge et accentue la récession qui s'installe ensuite avec une intensité proportionnelle à la longueur de la période d'expansion. Lors des récessions, le modèle produit une amplification des problèmes d'antisélection sur les marchés de la revente d'actifs titrisés. Ces problèmes sont particulièrement graves après une longue période d'expansion, et lorsque les actifs titrisés de grande qualité cessent de se négocier. Le modèle donne aussi...

Subprime borrowers, securitization and the transmission of business cycles

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Do investors value frequent issuers in securitization?

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