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Informational Efficiency in Securitization after Dodd-Frank

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  • Sean J Flynn
  • Andra C Ghent
  • Alexei Tchistyi
  • Stijn Van Nieuwerburgh

Abstract

We analyze how Dodd-Frank-mandated risk retention affects the information investors extract from issuers’ retention choices in the CMBS market. We show that the required retention level is both binding and stringent. Although this implies issuers cannot signal using the level of retention, we provide a model showing that signaling can occur by varying the retention structure. The model is consistent with spreads being empirically lower in deals with a purely first-loss retention structure. A stated concern of rulemakers is asymmetric information. However, we show that, post-crisis, the level of asymmetric information in this market is quite low.

Suggested Citation

  • Sean J Flynn & Andra C Ghent & Alexei Tchistyi & Stijn Van Nieuwerburgh, 2020. "Informational Efficiency in Securitization after Dodd-Frank," The Review of Financial Studies, Society for Financial Studies, vol. 33(11), pages 5131-5172.
    • Handle: RePEc:oup:rfinst:v:33:y:2020:i:11:p:5131-5172.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaa003
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    Cited by:

    1. Huh, Yesol & Kim, You Suk, 2023. "Cheapest-to-deliver pricing, optimal MBS securitization, and welfare implications," Journal of Financial Economics, Elsevier, vol. 150(1), pages 68-93.
    2. Thiemo Fetzer & Benjamin Guin & Felipe Netto & Farzad Saidi, 2024. "Insurers Monitor Shocks to Collateral: Micro Evidence from Mortgage-Backed Securities," CESifo Working Paper Series 11324, CESifo.
    3. Gürtler, Marc & Koch, Florian, 2021. "Multidimensional skin in the game," Journal of Mathematical Economics, Elsevier, vol. 97(C).
    4. Martin Hibbeln & Werner Osterkamp, 2024. "Simple is simply not enough—features versus labels of complex financial securities," Review of Derivatives Research, Springer, vol. 27(2), pages 113-150, July.
    5. Krahnen, Jan-Pieter & Wilde, Christian, 2022. "Skin-in-the-game in ABS transactions: A critical review of policy options," Journal of Financial Stability, Elsevier, vol. 60(C).
    6. Yesol Huh & You Suk Kim, 2021. "Cheapest-to-Deliver Pricing, Optimal MBS Securitization, and Market Quality," Finance and Economics Discussion Series 2021-031, Board of Governors of the Federal Reserve System (U.S.).
    7. Reher, Michael, 2021. "Finance and the supply of housing quality," Journal of Financial Economics, Elsevier, vol. 142(1), pages 357-376.

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