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
Date Written: March 28, 2016
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: Suggested Citation