Asymmetric information and the death of ABS CDOs

A key feature of the 2007 financial crisis is that for many securities trading had ceased; where trading did occur, market prices were well below intrinsic values, especially for ABS CDOs. One explanation is that information had been asymmetric, with sellers having better information than buyers. We...

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Bibliographic Details
Published inJournal of banking & finance Vol. 76; pp. 1 - 14
Main Authors Beltran, Daniel O., Cordell, Larry, Thomas, Charles P.
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.03.2017
Subjects
Asymmetric
CDO
Lemons
Securitization
Securitization
C63
Lemons
D43
Asymmetric
CDO
D82
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Summary:A key feature of the 2007 financial crisis is that for many securities trading had ceased; where trading did occur, market prices were well below intrinsic values, especially for ABS CDOs. One explanation is that information had been asymmetric, with sellers having better information than buyers. We first show the information advantages sellers had over buyers in both the issuance of CDOs and, through vertical integration, performance of the CDO collateral that could well have disrupted trading after the onset of the crisis. Using a “workhorse” model for pricing securities under asymmetric information and a novel dataset, we show how adverse selection could explain why the bulk of these securities either traded at significant discounts or did not trade at all.
ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2016.11.008