Are Lemons Sold First? Dynamic Signaling in the Mortgage Market

76 Pages Posted: 9 Jan 2018 Last revised: 16 Apr 2019

See all articles by Manuel Adelino

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

Multiple version iconThere are 3 versions of this paper

Date Written: January 2018

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 relationship 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, and in cases where the originator and the issuer of mortgage-backed securities are not affiliated.

Suggested Citation

Adelino, Manuel and Gerardi, Kristopher S. and Hartman-Glaser, Barney, Are Lemons Sold First? Dynamic Signaling in the Mortgage Market (January 2018). NBER Working Paper No. w24180, Available at SSRN: https://ssrn.com/abstract=3097953

Duke Innovation & Entrepreneurship Initiative ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Kristopher S. Gerardi

Federal Reserve Bank of Atlanta ( email )

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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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