Securitization, Transparency and Liquidity

56 Pages Posted: 5 Feb 2009 Last revised: 30 Dec 2010

See all articles by Marco Pagano

Marco Pagano

CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF); Einaudi Institute for Economics and Finance (EIEF); Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Paolo F. Volpin

Drexel University - Bennett S. LeBow College of Business; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); City University London - Faculty of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: November 30, 2010

Abstract

We present a model in which issuers of asset backed securities choose to release coarse information to enhance the liquidity of their primary market, at the cost of reducing secondary market liquidity or even causing it to freeze. The degree of transparency is inefficiently low if the social value of secondary market liquidity exceeds its private value. We analyze various types of public intervention - mandatory transparency standards, provision of liquidity to distressed banks or secondary market price support - and find that they have different welfare implications. Finally, we extend the model by endogenizing the private and social value of liquidity, the probability of liquidity trading, and the proportion of sophisticated investors.

Keywords: securitization, rating, liquidity, subprime lending crisis, default

JEL Classification: D82, G21, G18

Suggested Citation

Pagano, Marco and Volpin, Paolo F., Securitization, Transparency and Liquidity (November 30, 2010). EFA 2009 Bergen Meetings Paper, AFA 2010 Atlanta Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1337898 or http://dx.doi.org/10.2139/ssrn.1337898

Marco Pagano (Contact Author)

CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF) ( email )

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Paolo F. Volpin

Drexel University - Bennett S. LeBow College of Business ( email )

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

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HOME PAGE: http:/www.ecgi.org

City University London - Faculty of Finance ( email )

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Great Britain