To Pool or Not to Pool? Security Design in OTC Markets

48 Pages Posted: 21 Nov 2016 Last revised: 4 Oct 2018

See all articles by Vincent Glode

Vincent Glode

University of Pennsylvania - The Wharton School

Christian C. Opp

University of Pennsylvania - The Wharton School

Ruslan Sverchkov

University of Pennsylvania - The Wharton School

Date Written: September 26, 2018

Abstract

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

Glode, Vincent and Opp, Christian C. and Sverchkov, Ruslan, To Pool or Not to Pool? Security Design in OTC Markets (September 26, 2018). Available at SSRN: https://ssrn.com/abstract=2871374 or http://dx.doi.org/10.2139/ssrn.2871374

Vincent Glode (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Christian C. Opp

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-573-3186 (Phone)

Ruslan Sverchkov

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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