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Are Lemons Sold First? Dynamic Signaling in the Mortgage Market

67 Pages Posted: 19 Jul 2016 Last revised: 30 Aug 2017

Manuel Adelino

Duke University; Duke Innovation & Entrepreneurship Initiative; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Kristopher Gerardi

Federal Reserve Bank of Atlanta

Barney Hartman-Glaser

University of California, Los Angeles (UCLA) - Anderson School of Management

Date Written: 2016-07-01

Abstract

A central result in the theory of adverse selection in asset markets is that informed sellers can signal quality and obtain higher prices by delaying trade. This paper provides some of the first evidence of a signaling mechanism through trade delays using the residential mortgage market as a laboratory. We find a strong relation between mortgage performance and time-to-sale for privately securitized mortgages. Additionally, deals made up of more seasoned mortgages are sold at lower yields. These effects are strongest in the "Alt-A" segment of the market, where mortgages are often sold with incomplete hard information.

Keywords: securitization, mortgage default, adverse selection, signaling, asymmetric information

JEL Classification: G17, G21, G23

Suggested Citation

Adelino, Manuel and Gerardi, Kristopher and Hartman-Glaser, Barney, Are Lemons Sold First? Dynamic Signaling in the Mortgage Market (2016-07-01). FRB Atlanta Working Paper No. 2016-8. Available at SSRN: https://ssrn.com/abstract=2811560

Duke Innovation & Entrepreneurship Initiative ( email )

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National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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Centre for Economic Policy Research (CEPR) ( email )

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London, EC1V 3PZ
United Kingdom

Kristopher Gerardi

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
404-498-8561 (Phone)

HOME PAGE: http://sites.google.com/site/kristophergerardishomepage/

Barney Hartman-Glaser

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

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