Open AccessEquilibrium securitization with diverse beliefs
Author(s) -
Ellis Andrew,
Piccione Michele,
Zhang Shengxing
Publication year - 2022
Publication title -
theoretical economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.404
H-Index - 32
eISSN - 1555-7561
pISSN - 1933-6837
DOI - 10.3982/te4157
Subject(s) - securitization , issuer , pooling , asset (computer security) , business , financial economics , structured finance , default risk , economics , capital asset pricing model , microeconomics , actuarial science , finance , credit risk , computer science , computer security , financial crisis , artificial intelligence , macroeconomics
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.