Could Regulation of the ABS Secondary Market Improve Social Welfare?

44 Pages Posted: 10 Mar 2010

See all articles by Ramiro Losada

Ramiro Losada

Comision Nacional del Mercado de Valores

Multiple version iconThere are 2 versions of this paper

Date Written: October 2009

Abstract

This paper examines a model of market making in the ABS market with heterogeneous investors and a lack of price transparency. In this set-up, market makers enjoy market power due to the diversity of assets that back ABS bonds with the same rating: mortgages, credit cards, loans, corporate bonds, etc. It is shown that in a world with no price transparency, allowing free entry of market makers might not be social optimum. Social welfare would be improved by a regulation to restrict the number of market makers in the ABS market to the extent that price competition is guaranteed providing they are forced to buy and sell all possible types of ABS bonds: RMBS, CMBS, CDO, CLO, etc.

Keywords: ABS market, financial regulation, horizontal differentiation

JEL Classification: G15, G18, L81

Suggested Citation

Losada, Ramiro, Could Regulation of the ABS Secondary Market Improve Social Welfare? (October 2009). Available at SSRN: https://ssrn.com/abstract=1566864 or http://dx.doi.org/10.2139/ssrn.1566864

Ramiro Losada (Contact Author)

Comision Nacional del Mercado de Valores ( email )

c/edison 4
Madrid, Madrid 28006
Spain

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