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Valuation of ABS Under Asymmetric Information

In: Securitization: Past, Present and Future

Author

Listed:
  • Solomon Y Deku

    (Nottingham Trent University)

  • Alper Kara

    (Loughborough University)

Abstract

Securitization transactions are vulnerable to three related but distinct information problems. The first of which is the classic (lemons) adverse selection problem associated with the lender-borrower relationship where borrowers possibly have more private information about their projects than is available to lenders (originators). The intermediate information barrier materialises due to poor monitoring, where these possibly opaque loans are securitised, thereby incidentally resulting in asymmetric information between underlying borrowers and end ABS investors. Finally, there are moral hazard problems between the originator of the ABS and investors. Here, the originators have more private information about securitised loans and are less motivated to perform their monitoring function efficiently as the risk and ownership have been transferred to investors.

Suggested Citation

  • Solomon Y Deku & Alper Kara, 2017. "Valuation of ABS Under Asymmetric Information," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Securitization: Past, Present and Future, chapter 6, pages 113-129, Palgrave Macmillan.
    • Handle: RePEc:pal:pmschp:978-3-319-60128-1_6
    DOI: 10.1007/978-3-319-60128-1_6
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