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

Taylor A. Begley, Amiyatosh Purnanandam

Research output: Contribution to journalArticlepeer-review

30 Scopus citations

Abstract

We study the key drivers of security design in the residential mortgage-backed security (RMBS) market during the run-up to the subprime mortgage crisis. We show that deals with a higher level of equity tranche have a significantly lower delinquency rate conditional on observable loan characteristics. The effect is concentrated within pools with a higher likelihood of asymmetric information between deal sponsors and potential buyers of the securities. Further, securities sold from high-equity-tranche deals command higher prices conditional on their credit ratings. Overall, our results show that the goal of security design in this market was not only to exploit regulatory arbitrage, but also to mitigate information frictions that were pervasive in this market.

Original languageEnglish
Pages (from-to)120-161
Number of pages42
JournalReview of Financial Studies
Volume30
Issue number1
DOIs
StatePublished - Jan 2017

Bibliographical note

Publisher Copyright:
© The Author 2016.

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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