Taylor Begley, Amiyatosh Purnanandam, 01 April 2014

The recent financial crisis was followed by discussions about that went wrong in the securitisation markets. This column describes some empirical work in the area of informational problems in the securitisation markets. In particular, it examines the tranche structure of deals in the private-label residential mortgage-backed securities (RMBS) markets. The role the equity tranche played in mitigating the information problems in the period up to the crisis is discussed. A larger equity tranche is related to superior ex-post default performance, as predicted by some models of contracting under asymmetric information.

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