Ozdenoren, E, Yuan, K and Zhang, S (2023) Dynamic Asset-Backed Security Design. Review of Economic Studies, 90 (6). pp. 3282-3314. ISSN 0034-6527
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.
More Details
Item Type: | Article |
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Subject Areas: | Economics |
Additional Information: |
A correction has been published: The Review of Economic Studies, Volume 90, Issue 5, October 2023, Page 2674, https://doi.org/10.1093/restud/rdad056 |
Date Deposited: | 04 Apr 2023 15:18 |
Date of first compliant deposit: | 04 Apr 2023 |
Subjects: |
Crises Financial institutions Investment appraisal Investment theory |
Last Modified: | 01 Oct 2024 12:18 |
URI: | https://lbsresearch.london.edu/id/eprint/2803 |
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