Loan-level Disclosure and the Convenience Yield of Asset-Backed Securities

57 Pages Posted: 27 Jan 2019 Last revised: 6 Feb 2024

See all articles by Brent Schmidt

Brent Schmidt

Pennsylvania State University - Department of Accounting

Haiwen (Helen) Zhang

University of Minnesota

Date Written: January 25, 2024

Abstract

We examine the impact of transparency on the convenience yield of AAA-rated asset-backed security (ABS) tranches. AAA tranches of ABS are commonly held by investors to manage financial liquidity and therefore enjoy a price premium beyond what is determined solely by the expected monetary payoff (i.e., convenience yield). The Securities and Exchange Commission (SEC) requires ABS issuers to provide monthly disclosures about the performance of the underlying individual loans for ABS issued after November 23, 2016 to improve transparency. We document that AAA tranches of ABS experience a significant increase in price volatility after the loan-level disclosure mandate. As a result, the use of these tranches as collateral for short-term funding and their convenience yield decrease significantly after the increased disclosure. Our collective evidence highlights an important unintended consequence of increased transparency in the ABS market; it diminishes the pledgeability of long-term safe assets.

Keywords: Convenience yield; loan-level disclosure; asset-backed securities.

JEL Classification: G14; G23; M48.

Suggested Citation

Schmidt, Brent and Zhang, Haiwen (Helen), Loan-level Disclosure and the Convenience Yield of Asset-Backed Securities (January 25, 2024). Available at SSRN: https://ssrn.com/abstract=3316344 or http://dx.doi.org/10.2139/ssrn.3316344

Brent Schmidt

Pennsylvania State University - Department of Accounting ( email )

University Park, PA 16802-3306
United States

Haiwen (Helen) Zhang (Contact Author)

University of Minnesota ( email )

3-122 Carlson School of Management
321-19th Avenue South
Minneapolis, MN 55455
United States

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