Secondary Market Liquidity and Security Design: Theory and Evidence from ABS Markets

Friewald Nils, Christopher Hennessy, Rainer Jankowitsch

Publikation: Wissenschaftliche FachzeitschriftOriginalbeitrag in FachzeitschriftBegutachtung

Abstract

We develop and empirically test a theory of optimal security design under adverse selection accounting for strategic trading by uninformed investors who will liquidate a security in secondary markets only if their idiosyncratic carrying cost exceeds the security's expected trading loss. Such investors demand primary market discounts equaling expected carrying costs borne plus trading losses incurred. Issuers minimize the total illiquidity discount by splitting cash flow into tranched debt claims with liquidity predicted to increase with seniority, while the optimal number of tranches increases with underlying cash flow risk. Empirical tests confirm our model predictions.
OriginalspracheEnglisch
Seiten (von - bis)1254 - 1290
FachzeitschriftReview of Financial Studies
Jahrgang29
Ausgabenummer5
DOIs
PublikationsstatusVeröffentlicht - 2016

Österreichische Systematik der Wissenschaftszweige (ÖFOS)

  • 502004 Bankbetriebslehre
  • 502052 Betriebswirtschaftslehre
  • 101007 Finanzmathematik
  • 502009 Finanzwirtschaft

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