Complexity in Structured Finance
Andra C. Ghent
University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics
Walter N. Torous
University of California, Los Angeles (UCLA) - Finance Area
Rossen I. Valkanov
University of California, San Diego (UCSD) - Rady School of Management
January 26, 2016
Sellers of products can increase buyers' search costs by obfuscating either the price or the quality of the product. We study complexity in the market for securitized products, a market in which it is easy for buyers to observe prices but difficult to observe product quality. We find that securities in more complex residential MBS 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.
Number of Pages in PDF File: 46
Keywords: Complexity, Security Design, MBS Performance
JEL Classification: G12, G14, G21, G24
Date posted: September 15, 2013 ; Last revised: January 28, 2016
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