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Equilibrium securitization with diverse beliefs

Author

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  • Ellis, Andrew
  • Piccione, Michele
  • Zhang, Shengxing

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.

Suggested Citation

  • Ellis, Andrew & Piccione, Michele & Zhang, Shengxing, 2022. "Equilibrium securitization with diverse beliefs," LSE Research Online Documents on Economics 113728, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:113728
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    File URL: http://eprints.lse.ac.uk/113728/
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    References listed on IDEAS

    as
    1. Franklin Allen, Douglas Gale, 1988. "Optimal Security Design," The Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 229-263.
    2. Joshua Coval & Jakub Jurek & Erik Stafford, 2009. "The Economics of Structured Finance," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 3-25, Winter.
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    Cited by:

    1. 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.

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    More about this item

    Keywords

    securitization; heterogeneous beliefs; collateral; tranching; pooling;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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