57 Pages Posted: 15 Sep 2013 Last revised: 13 May 2017
Date Written: April 26, 2017
We study complexity in the market for securitized products, a market in which it is easy for buyers to observe prices but difficult to observe product quality. We find that securities in more complex residential MBS deals default more and have lower IRRs. The higher likelihood of default 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. A channel by which complexity affects security default is the diversion of collateral cash from higher-rated to residual tranches.
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 (April 26, 2017). Available at SSRN: https://ssrn.com/abstract=2325835 or http://dx.doi.org/10.2139/ssrn.2325835