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(When) does transparency hurt liquidity?



Publishing details

Social Sciences Research Network

Authors / Editors

Balakrishnan K;Ertan A;Lee Y


Publication Year



Conventional wisdom suggests that transparency improves market liquidity. However, if greater public information incentivizes only a subset of investors to produce private information, it could exacerbate information asymmetry among investors and thereby reduce liquidity. To test this proposition, we examine the liquidity effects of a European regulation that requires banks to provide detailed disclosures about the individual loans underlying their mortgage-backed securities (MBSs). We find that the liquidity of treated MBSs declines by 14% post-regulation. By exploiting tranche seniority and collateral quality, we also document that the effect of transparency on liquidity non-monotonically varies with investors’ incentives to seek information.


Liquidity; transparency; securitization; information sensitivity; regulation; MBS


Social Sciences Research Network

Available on ECCH


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