Complexity in Structured Finance: Financial Wizardry or Smoke and Mirrors?
Andra C. Ghent
Arizona State University (ASU) - Finance Department
Walter N. Torous
University of California, Los Angeles (UCLA) - Finance Area
Rossen I. Valkanov
University of California, San Diego (UCSD) - Rady School of Management
May 25, 2014
We use data from prospectus supplements to create measures of the complexity of securitized products. 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. The relation between complexity and default is not primarily due to issuers masking low quality loans as it persists after controlling for the collateral default rate. Rather than creating safer securities, complexity disadvantages more senior securities within a deal. Rating agencies are more lenient in rating complex deals.
Number of Pages in PDF File: 55
JEL Classification: G12, G14, G21, G24working papers series
Date posted: September 15, 2013 ; Last revised: May 27, 2014
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