Dynamic Asset-Backed Security Design

65 Pages Posted: 14 Aug 2018 Last revised: 6 Dec 2022

See all articles by Emre Ozdenoren

Emre Ozdenoren

London Business School; Centre for Economic Policy Research (CEPR)

Kathy Yuan

London School of Economics & Political Science (LSE) - Department of Finance

Shengxing Zhang

Peking University HSBC Business School; London School of Economics (LSE) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2022


Borrowers obtain liquidity by issuing securities backed by the current period payoff and resale price of a long-lived collateral asset, and they are privately informed about the payoff distribution. Asset price can be self-fulfilling: a higher asset price lowers adverse selection and allows borrowers to raise greater funding, which makes the asset more valuable, leading to multiple equilibria. Optimal security design eliminates multiple equilibria, improves welfare, and can be implemented as a repo contract. Persistent adverse selection lowers debt funding, generates volatility in asset prices and exacerbates credit crunches. The theory demonstrates the role of asset-backed securities on stability of market-based financial systems.

Keywords: Liquidity; Dynamic Price Feedback; Tradable Assets; Security Design; Multiple Equilibria; Self-fulfilling Prices; Financial Fragility; Haircut; Repo; Repo Runs; Credit Crunch; Asset-Backed Security; Collateral; Limited Commitment; Adverse Selection; Market Based Financial Intermediation

JEL Classification: G10; G01

Suggested Citation

Ozdenoren, Emre and Yuan, Kathy Zhichao and Zhang, Shengxing, Dynamic Asset-Backed Security Design (December 1, 2022). Available at SSRN: https://ssrn.com/abstract=3216085 or http://dx.doi.org/10.2139/ssrn.3216085

Emre Ozdenoren

London Business School ( email )

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Centre for Economic Policy Research (CEPR)

United Kingdom

Kathy Zhichao Yuan

London School of Economics & Political Science (LSE) - Department of Finance ( email )

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London, London WC2A 2AE
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HOME PAGE: http://fmg.lse.ac.uk/~kathy

Shengxing Zhang (Contact Author)

Peking University HSBC Business School ( email )

London School of Economics (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

HOME PAGE: http://https://sites.google.com/site/oo7zsx/

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