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Equilibrium securitization with diverse beliefs

Ellis, Andrew ORCID: 0000-0002-7552-4832, Piccione, Michele and Zhang, Shengxing ORCID: 0000-0002-1475-2188 (2022) Equilibrium securitization with diverse beliefs. Theoretical Economics, 17 (1). 121 - 152. ISSN 1933-6837

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Identification Number: 10.3982/TE4157

Abstract

We study the effects of diverse beliefs on equilibrium securitization under risk neutrality. We provide a simple characterization of the optimal securities. Pooling and tranching of assets emerges in equilibrium as a consequence of the traders' diverse beliefs about asset returns. The issuer of securities tranches the asset pool, and traders sort among the tranches according to their beliefs. We show how the traders' disagreement about the correlation of asset returns is a key factor in determining which assets are pooled.

Item Type: Article
Official URL: https://econtheory.org/
Additional Information: © 2022 The Authors.
Divisions: Economics
Subjects: H Social Sciences > HB Economic Theory
JEL classification: D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D53 - Financial Markets
G - Financial Economics > G2 - Financial Institutions and Services > G20 - General
Date Deposited: 10 Feb 2022 16:09
Last Modified: 11 Feb 2022 09:48
URI: http://eprints.lse.ac.uk/id/eprint/113728

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