Securitization, Transparency and Liquidity

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