Ozdenoren, Emre, Yuan, Kathy ORCID: 0000-0001-9895-7545 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
Text (Dynamic Asset-Backed Security Design)
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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 |
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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: | 12 Dec 2024 03:46 |
URI: | http://eprints.lse.ac.uk/id/eprint/119375 |
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