Equilibrium Securitization with Diverse Beliefs
46 Pages Posted: 3 Aug 2017 Last revised: 1 Oct 2018
Date Written: August 22, 2017
We study a general equilibrium model in which securitization emerges as a consequence of the traders' diverse beliefs about the return of a risky asset. A firm can issue and sell any feasible, monotone securities backed by a risky financial asset to risk neutral traders. Prices and characteristics of securities are determined endogenously in general equilibrium. We provide a simple characterization of the equilibrium securities, and show existence and essential uniqueness of equilibrium. Under a weak restriction on the traders' beliefs, our model delivers tranching as an equilibrium outcome. We extend the model to consider pooling of assets backing the securities, the dynamics of securitization and risk averse traders.
Keywords: securitization, heterogeneous beliefs, collateral, tranching, pooling
JEL Classification: D53; G20
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