Pooling and Tranching under Belief Disagreement
49 Pages Posted: 6 Jun 2015 Last revised: 10 Jul 2019
Date Written: July 8, 2019
We study optimal security design when issuer and market participants disagree about the characteristics of the underlying asset. We show that pooling and tranching assets can be preferable to selling optimal securities backed by individual assets: pooling can be a response to belief disagreement between issuer and investors; tranching allows the issuer to exploit belief disagreement among investors. Moreover, differences in beliefs can make pooling and tranching complements; asymmetric information alone cannot.
Keywords: Disagreement, Security Design, Optimism, Overconfidence, Pooling, Tranching, Behavioral Finance
JEL Classification: G30, G32, D84, D86
Suggested Citation: Suggested Citation