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Complexity in Structured Finance

68 Pages Posted: 15 Sep 2013 Last revised: 27 Aug 2017

Andra C. Ghent

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics

Walter N. Torous

Massachusetts Institute of Technology

Rossen I. Valkanov

University of California, San Diego (UCSD) - Rady School of Management

Date Written: August 25, 2017

Abstract

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

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

Andra C. Ghent (Contact Author)

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

Walter N. Torous

Massachusetts Institute of Technology ( email )

Center for Real Estate and Sloan School
Cambridge, MA 02138
United States

Rossen Valkanov

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States
858-534-0898 (Phone)

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