Working Paper: CEPR ID: DP7105
Authors: Marco Pagano; Paolo Volpin
Abstract: We present a model in which issuers of asset backed securities choose to release coarse information to enhance the liquidity of their primary market, at the cost of reducing secondary market liquidity or even causing it to freeze. The degree of transparency is inefficiently low if the social value of secondary market liquidity exceeds its private value. We analyze various types of public intervention ? mandatory transparency standards, provision of liquidity to distressed banks or secondary market price support ? and find that they have quite different welfare implications. Finally, transparency is greater if issuers restrain the issue size, or tranche it so as to sell the more information-sensitive tranche to sophisticated investors only.
Keywords: default; liquidity; rating; securitization; subprime lending crisis; transparency
JEL Codes: D82; G18; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Issuers choose to release coarse information (G24) | enhance primary market liquidity (G10) |
| Issuers choose to release coarse information (G24) | reduce secondary market liquidity (G19) |
| The social value of secondary market liquidity exceeds its private value (D46) | inefficiently low transparency (D61) |
| Issuers restrain issue size or tranche it (G24) | greater transparency (G38) |
| Public intervention (mandatory transparency standards or liquidity provision) (G28) | varying welfare implications (I38) |
| Transparency is optimal when the probability of liquidity shocks is high (D80) | market conditions influence optimal transparency (D41) |