Design of Financial Securities: Empirical Evidence from Private-Label RMBS Deals

Begley, Taylor A. and Purnanandam, Amiyatosh K., Design of Financial Securities: Empirical Evidence from Private-Label RMBS Deals. Review of Financial Studies, 30 (1): 120-161, 2017, DOI: 10.1093/rfs/hhw056

61 Pages Posted: 15 Mar 2012 Last revised: 14 Apr 2017

See all articles by Taylor A. Begley

Taylor A. Begley

Washington University in St. Louis - John M. Olin Business School

Amiyatosh K. Purnanandam

University of Michigan, Stephen M. Ross School of Business

Date Written: March 28, 2016

Abstract

We study the key drivers of security design in the residential mortgage-backed security (RMBS) market during the run-up to the subprime mortgage crisis. We show that deals with a higher level of equity tranche have a significantly lower delinquency rate conditional on observable loan characteristics. The effect is concentrated within pools with a higher likelihood of asymmetric information between deal sponsors and potential buyers of the securities. Further, securities that are sold from high-equity-tranche deals command higher prices conditional on their credit ratings. Overall, our results show that the goal of security design in this market was not only to exploit regulatory arbitrage, but also to mitigate information frictions that were pervasive in this market.

Keywords: Security design, Mortgage-backed securities, Equity tranche, Subprime mortgage crisis

JEL Classification: G20, G30

Suggested Citation

Begley, Taylor A. and Purnanandam, Amiyatosh K., Design of Financial Securities: Empirical Evidence from Private-Label RMBS Deals (March 28, 2016). Begley, Taylor A. and Purnanandam, Amiyatosh K., Design of Financial Securities: Empirical Evidence from Private-Label RMBS Deals. Review of Financial Studies, 30 (1): 120-161, 2017, DOI: 10.1093/rfs/hhw056. Available at SSRN: https://ssrn.com/abstract=2022380 or http://dx.doi.org/10.2139/ssrn.2022380

Taylor A. Begley

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

HOME PAGE: http://www.taylorbegley.com

Amiyatosh K. Purnanandam (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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