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Portfolio Liquidity and Security Design with Private Information
[Strategic liquidity supply and security design]

Author

Listed:
  • Peter M DeMarzo
  • David M Frankel
  • Yu Jin

Abstract

A privately informed seller seeks to liquidate a portfolio to raise cash. Each asset’s liquidity thus depends on the impact of its sale on the value of the entire portfolio. We demonstrate the importance of cross-signaling and derive sufficient conditions for a liquidity “pecking order” that determines the order of sale. For assets backed by a common pool, liquidity naturally aligns with seniority. Finally, we extend the portfolio liquidation game to consider security design and demonstrate the optimality of pooling securities and selling senior tranches or debt secured by the pool, with retention increasing in asset quality or informational asymmetry.

Suggested Citation

  • Peter M DeMarzo & David M Frankel & Yu Jin, 2021. "Portfolio Liquidity and Security Design with Private Information [Strategic liquidity supply and security design]," The Review of Financial Studies, Society for Financial Studies, vol. 34(12), pages 5841-5885.
    • Handle: RePEc:oup:rfinst:v:34:y:2021:i:12:p:5841-5885.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaa147
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    Citations

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    Cited by:

    1. Narjess Bouslama, 2023. "Interdependence between the BRICS Stock Markets and the Oil Price since the Onset of Financial and Economic Crises," JRFM, MDPI, vol. 16(7), pages 1-22, June.
    2. Cesa-Bianchi, Ambrogio & Eguren-Martin, Fernando, 2021. "Dash for dollars," Bank of England working papers 932, Bank of England.
    3. Chaigneau, Pierre, 2023. "Capital Structure with Information about the Upside and the Downside," MPRA Paper 121397, University Library of Munich, Germany.
    4. Alex Gershkov & Benny Moldovanu & Philipp Strack & Mengxi Zhang, 2024. "Optimal Security Design for Risk-Averse Investors," ECONtribute Discussion Papers Series 325, University of Bonn and University of Cologne, Germany.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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