Working Paper: CEPR ID: DP16091
Authors: Andrew Ellis; Michele Piccione; Shengxing Zhang
Abstract: We study the effects of diverse beliefs on equilibrium securitization under risk neutrality. We provide a simple characterization of the optimal securities. Pooling and tranching of assets emerges in equilibrium as a consequence of the traders’ diverse beliefs about asset returns. The issuer of securities tranches the asset pool, and traders sort among the tranches according to their beliefs. We show how the traders’ disagreement about the correlation of asset returns is a key factor in determining which assets are pooled.
Keywords: securitization; heterogeneous beliefs; collateral; tranching; pooling
JEL Codes: D53; G20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| disagreement about asset returns (G19) | securitization (G10) |
| disagreement about correlations (C10) | pooling (C71) |
| disagreement about asset returns (G19) | asset pooling (G32) |
| disagreement about correlations (C10) | securitization (G10) |