Skip to main content

Please enter a keyword and click the arrow to search the site

Secondary market liquidity and security design: theory and evidence from ABS markets


Review of Financial Studies



Authors / Editors

Friewald N;Hennessy C;Jankowitsch R

Publication Year



We develop and empirically test a theory of optimal security design under adverse selection accounting for strategic trading by uninformed investors who will liquidate a security in secondary markets only if their idiosyncratic carrying costs exceed the security's expected trading loss. Such investors demand primary market discounts equaling expected carrying costs borne plus trading losses incurred. Issuers minimize the total illiquidity discount by splitting cash-flow into tranched debt claims with liquidity predicted to increase with seniority, while the optimal number of tranches increases with underlying cash-flow risk. Empirical tests confirm our model predictions.

Available on ECCH


Select up to 4 programmes to compare

Select one more to compare
subscribe_image_desktop 5949B9BFE33243D782D1C7A17E3345D0

Sign up to receive our latest news and business thinking direct to your inbox


Sign up to receive our latest course information and business thinking

Leave your details above if you would like to receive emails containing the latest thought leadership, invitations to events and news about courses that could enhance your career. If you would prefer not to receive our emails, you can still access the case study by clicking the button below. You can opt-out of receiving our emails at any time by visiting: or by unsubscribing through the link provided in our emails. View our Privacy Policy for more information on your rights.