Dynamic Coordination with Flexible Security Design

54 Pages Posted: 14 Aug 2018 Last revised: 28 Sep 2020

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

London School of Economics (LSE) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 25, 2020

Abstract

Borrowers obtain liquidity by issuing securities backed by the dividend and resale price of a long- lived collateral asset. Security design alleviates adverse selection in the securities markets arising from borrowers’ private information about the collateral quality. Security design and asset price are inter-dependent. Higher asset price lowers adverse selection in securities and generates more liquidity via a larger debt tranche and vice versa. When restricted to issuing equity only, dynamic feedback between asset price and collateral quality leads to multiple equilibria. Optimal flexible security design eliminates multiple equilibria, improves welfare through inter-temporal coordination, and can be implemented as term repo.

Keywords: Liquidity; Dynamic Price Feedback; Inter-temporal Coordination; Security Design; Multiple Equilibria; Self-fulfilling Prices; Financial Fragility; Haircut; Repo Runs; Quality-Insensitive Securities; Repo; Asset-Backed Security; Collateral; Limited Commitment; Adverse Selection.

JEL Classification: G10; G01

Suggested Citation

Ozdenoren, Emre and Yuan, Kathy Zhichao and Zhang, Shengxing, Dynamic Coordination with Flexible Security Design (September 25, 2020). Available at SSRN: https://ssrn.com/abstract=3216085 or http://dx.doi.org/10.2139/ssrn.3216085

Emre Ozdenoren

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Kathy Zhichao Yuan

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

Old Building
Houghton Street
London, London WC2A 2AE
United Kingdom
+44 (0)20 7955 6407 (Phone)
+44 (0)20 7849 4647 (Fax)

HOME PAGE: http://fmg.lse.ac.uk/~kathy

Shengxing Zhang (Contact Author)

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/

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
237
Abstract Views
1,349
rank
145,284
PlumX Metrics