Dynamic asset-backed security design

Ozdenoren, Emre, Yuan, Kathy and Zhang, Shengxing ORCID: 0000-0002-1475-2188 (2023) Dynamic asset-backed security design. Review of Economic Studies, 90 (6). 3282 - 3314. ISSN 0034-6527

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Abstract

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.

Item Type:	Article
Official URL:	https://academic.oup.com/restud
Additional Information:	© 2023 The Authors
Divisions:	Economics Finance
Subjects:	H Social Sciences > HB Economic Theory
JEL classification:	G - Financial Economics > G1 - General Financial Markets > G10 - General
Date Deposited:	09 Jun 2023 13:06
Last Modified:	25 Apr 2024 20:48
URI:	http://eprints.lse.ac.uk/id/eprint/119375

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