Abstract

http://ssrn.com/abstract=2325835
 
 

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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

August 9, 2014


Abstract:     
We use data from prospectus supplements to measure the complexity of securitized products. We find that securities in more complex deals default more. The higher likelihood of default is economically meaningful: a one standard deviation increase in complexity represents a 17\% increase in default on AAA securities. However, yields of more complex securities are not higher indicating that investors do not perceive them as riskier. 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. Rating agencies are more lenient in rating complex deals.

Number of Pages in PDF File: 54

Keywords: Complexity, Security Design, MBS Performance

JEL Classification: G12, G14, G21, G24

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Date posted: September 15, 2013 ; Last revised: August 9, 2014

Suggested Citation

Ghent, Andra C. and Torous, Walter N. and Valkanov, Rossen I., Complexity in Structured Finance: Financial Wizardry or Smoke and Mirrors? (August 9, 2014). Available at SSRN: http://ssrn.com/abstract=2325835 or http://dx.doi.org/10.2139/ssrn.2325835

Contact Information

Andra C. Ghent (Contact Author)
Arizona State University (ASU) - Finance Department ( email )
W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States
HOME PAGE: http://www.public.asu.edu/~aghent/
Walter N. Torous
University of California, Los Angeles (UCLA) - Finance Area ( email )
Los Angeles, CA 90095-1481
United States
310-825-4059 (Phone)
310-206-5455 (Fax)
Rossen Valkanov
University of California, San Diego (UCSD) - Rady School of Management ( email )
9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States
858-534-0898 (Phone)
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