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

Subject

Finance

Publishing details

Working Paper

Authors / Editors

Begley T;Purnanandam A

Publication Year

2016

Abstract

Using a representative sample of residential mortgage-backed security (RMBS) deals from the pre-crisis period, we show that deals with a higher level of equity tranche have a significantly lower foreclosure rate that cannot be explained away by the underlying loan pool's observable credit risk factors. The effect is concentrated within pools with a higher likelihood of asymmetric information between deal sponsors and potential buyers of the securities. Further, securities that are sold from high-equity-tranche deals command higher prices conditional on their credit ratings. Our study provides the first in-depth analysis of the effectiveness of the equity tranche in mitigating informational frictions in this market.

Keywords

Security design; Mortgage-backed securities; Equity tranche; Subprime mortgage crisis

Series

Working Paper

Available on ECCH

No


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