(When) Does Transparency Hurt Liquidity?

48 Pages Posted: 7 Sep 2019

See all articles by Karthik Balakrishnan

Karthik Balakrishnan

Rice University - Jesse H. Jones Graduate School of Business

Aytekin Ertan

London Business School

Yun Lee

Singapore Management University; London Business School

Date Written: September 3, 2019


Conventional wisdom suggests that transparency improves market liquidity. However, if greater public information incentivizes only a subset of investors to produce private information, it could exacerbate information asymmetry among investors and thereby reduce liquidity. To test this proposition, we examine the liquidity effects of a European regulation that requires banks to provide detailed disclosures about the individual loans underlying their mortgage-backed securities (MBSs). We find that the liquidity of treated MBSs declines by 14% post-regulation. By exploiting tranche seniority and collateral quality, we also document that the effect of transparency on liquidity non-monotonically varies with investors’ incentives to seek information.

Keywords: liquidity, transparency, securitization, information sensitivity, regulation, MBS

JEL Classification: G10, G21, G23, G28

Suggested Citation

Balakrishnan, Karthik and Ertan, Aytekin and Lee, Yun, (When) Does Transparency Hurt Liquidity? (September 3, 2019). Available at SSRN: https://ssrn.com/abstract=3447412 or http://dx.doi.org/10.2139/ssrn.3447412

Karthik Balakrishnan

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Aytekin Ertan (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom
442070008131 (Phone)

Yun Lee

Singapore Management University ( email )

60 Stamford Road
Singapore, 178900

London Business School

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

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