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Securitization under Asymmetric Information over the Business Cycle

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  • Martin Kuncl
Abstract
This paper studies the efficiency of financial intermediation through securitization in a model with heterogeneous investment projects and asymmetric information about the quality of securitized assets. I show that when retaining part of the risk, the issuer of securitized assets may credibly signal its quality. However, in the boom stage of the business cycle this practice is inefficient, information on asset quality remains private, and lower-quality assets accumulate on balance sheets of financial intermediaries. This prolongs and deepens a subsequent recession with an intensity proportional to the length of the preceding boom. In recessions, the model also produces amplification of adverse selection problems on resale markets for securitized assets. These are especially severe after a prolonged boom period and when securitized high-quality assets are no longer traded. The model also suggests that improperly designed regulation requiring higher explicit risk retention may become counterproductive due to a negative general-equilibrium effect; i.e., it may adversely affect both the quantity and the quality of investment in the economy.

Suggested Citation

  • Martin Kuncl, 2015. "Securitization under Asymmetric Information over the Business Cycle," Staff Working Papers 15-9, Bank of Canada.
    • Handle: RePEc:bca:bocawp:15-9
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    Cited by:

    1. Segura, Anatoli & Zeng, Jing, 2020. "Off-balance sheet funding, voluntary support and investment efficiency," Journal of Financial Economics, Elsevier, vol. 137(1), pages 90-107.
    2. Anna Grodecka‐Messi, 2019. "Subprime borrowers, securitization and the transmission of business cycles," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 52(4), pages 1600-1654, November.
    3. Martin Kuncl, 2016. "Fragility of Resale Markets for Securitized Assets and Policy of Asset Purchases," Staff Working Papers 16-46, Bank of Canada.
    4. Gyoengyi Loranth & Anatoli Segura & Jing Zeng, 2022. "Voluntary support and ring-fencing in cross-border banks," Temi di discussione (Economic working papers) 1373, Bank of Italy, Economic Research and International Relations Area.
    5. Lim, Jesslyn & Do, Viet & Vu, Tram, 2020. "Co-opted directors, covenant intensity, and covenant violations," Journal of Corporate Finance, Elsevier, vol. 64(C).
    6. van der Plaat, Mark T., 2021. "How to Measure Securitization: A Structural Equation Approach," MPRA Paper 109735, University Library of Munich, Germany.
    7. Kostyantyn Anatolievich Malyshenko & Majid Mohammad Shafiee & Vadim Anatolievich Malyshenko & Marina Viktorovna Anashkina, 2023. "Dynamics of the securities market in the information asymmetry context: developing a methodology for emerging securities markets," Papers 2307.04140, arXiv.org.
    8. Deku, Solomon Y. & Kara, Alper & Zhou, Yifan, 2019. "Securitization, bank behaviour and financial stability: A systematic review of the recent empirical literature," International Review of Financial Analysis, Elsevier, vol. 61(C), pages 245-254.
    9. Solomon Y. Deku & Alper Kara & Nodirbek Karimov, 2021. "Do investors value frequent issuers in securitization?," Review of Quantitative Finance and Accounting, Springer, vol. 57(4), pages 1247-1282, November.
    10. Solomon Y. Deku & Alper Kara & David Marques‐Ibanez, 2019. "Trustee reputation in securitization: When does it matter?," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 28(2), pages 61-84, May.
    11. van der Plaat, Mark & Spierdijk, Laura, 2020. "Recourse, asymmetric information, and credit risk over the business cycle," MPRA Paper 104718, University Library of Munich, Germany.

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    More about this item

    Keywords

    Business fluctuations and cycles; Credit and credit aggregates; Economic models; Financial markets; Financial stability; Financial system regulation and policies;
    All these keywords.

    JEL classification:

    • E - Macroeconomics and Monetary Economics
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G - Financial Economics
    • G0 - Financial Economics - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G2 - Financial Economics - - Financial Institutions and Services
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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