Security Design with Interim Public Information

45 Pages Posted: 8 Mar 2013 Last revised: 11 Oct 2016

See all articles by André Stenzel

André Stenzel

University of Mannheim and MaCCI

Date Written: October 10, 2016


We consider a security design problem where public information about the security’s underlying cash-flow arrives between trading periods. The optimal security minimizes less-than-full realization of gains from trade due to limited cash in the market, which may depend on the interim information. We show that the optimal security can be expressed as a convex combination of securities solving minimization problems for which the solutions share many debt-like features but exhibit endogenous tranching. We provide conditions for the non-optimality of standard debt contracts and show that implementation of the class of optimal securities can be achieved by mezzanine tranche retention, providing a public information rationale for departure from the pecking order.

Keywords: Security Design, Symmetric Information Arrival, Tranching

JEL Classification: D84, D86, E51, G14

Suggested Citation

Stenzel, André, Security Design with Interim Public Information (October 10, 2016). Available at SSRN: or

André Stenzel (Contact Author)

University of Mannheim and MaCCI ( email )

Department of Economics, University of Mannheim
L7, 3-5
Mannheim, 68131

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