To Pool or Not to Pool? Security Design in OTC Markets
48 Pages Posted: 21 Nov 2016 Last revised: 4 Oct 2018
Date Written: September 26, 2018
This paper studies the optimality of pooling and tranching for a privately informed security originator facing buyers endowed with market power (perhaps due to liquidity shortages). Contrary to the standard result that pooling and tranching are optimal practices, we find that selling assets separately may be optimal for originators as it weakens buyers' incentives to inefficiently screen them. Our results can shed light on observed time-variations in the prevalence of pooling and tranching in financial markets.
Keywords: Pooling, Security Design, Liquidity, Adverse Selection, OTC Markets, Financial Markets Imperfections
JEL Classification: D82, G32, L14
Suggested Citation: Suggested Citation