68 Pages Posted: 15 Sep 2013 Last revised: 27 Aug 2017
Date Written: August 25, 2017
We study complexity in the market for securitized products, a market at the heart of the financial crisis of 2007-2009. Our measures of the complexity of these products rose substantially in the years preceding the financial crisis. We find that securities in more complex deals default more and have lower realized returns. The worse performance is economically meaningful: a one standard deviation increase in complexity represents an 18% increase in default on AAA securities. However, yields of more complex securities are not higher indicating that investors do not perceive them as riskier. Our results indicate that complexity obfuscates security quality.
Keywords: Complexity, Security Design, MBS Performance
JEL Classification: G12, G14, G21, G24
Suggested Citation: Suggested Citation
Ghent, Andra C. and Torous, Walter N. and Valkanov, Rossen I., Complexity in Structured Finance (August 25, 2017). Available at SSRN: https://ssrn.com/abstract=2325835 or http://dx.doi.org/10.2139/ssrn.2325835
By Stefan Petry