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
January 8, 2014
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.
Number of Pages in PDF File: 45
JEL Classification: G12, G14, G21, G24working papers series
Date posted: September 15, 2013 ; Last revised: January 9, 2014
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