Design of financial securities: empirical evidence from private-label RMBS deals

Begley, T A and Purnanandam, A (2016) Design of financial securities: empirical evidence from private-label RMBS deals. The Review of Financial Studies, 30 (1). pp. 120-161. ISSN 0893-9454 OPEN ACCESS

Abstract

We study the key drivers of security design in the residential mortgage-backed security (RMBS) market during the run-up to the subprime mortgage crisis. We show that deals with a higher level of equity tranche have a significantly lower delinquency rate conditional on observable loan characteristics. The effect is concentrated within pools with a higher likelihood of asymmetric information between deal sponsors and potential buyers of the securities. Further, securities sold from high-equity-tranche deals command higher prices conditional on their credit ratings. Overall, our results show that the goal of security design in this market was not only to exploit regulatory arbitrage, but also to mitigate information frictions that were pervasive in this market.

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Item Type: Article
Subject Areas: Finance
Additional Information: This is a pre-copyedited, author-produced version of an article accepted for publication in Review of Financial Studies following peer review. The version of record: Taylor A. Begley, Amiyatosh Purnanandam; 'Design of financial securities: empirical evidence from private-label RMBS deals', Review of Financial Studies (2017) 30(1) pp.120-161, is available online at: https://academic.oup.com/rfs/article/30/1/120/2669961/Design-of-Financial-Securities-Empirical-Evidence and at: https://doi.org/10.1093/rfs/hhw056
Subjects: S > Securities markets
S > Securities
M > Mortgages
Date Deposited: 21 Dec 2016 14:11
Last Modified: 14 Jul 2019 15:43
URI: http://lbsresearch.london.edu/id/eprint/844
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