The Fed – The Dynamics of Adverse Selection in Privately-Produced Safe Debt Markets

October 2020

The Dynamics of Adverse Selection in Privately-Produced Safe Debt Markets

Nathan Foley-Fisher, Gary Gorton, & Stéphane Verani

Abstract:

Privately-produced safe debt is designed so that there is no adverse selection in trade. This is because no agent finds it profitable to produce private information about the debt’s backing & all agents know this (i.e., it is information-insensitive). But in some macro states, it becomes profitable for some agents to produce private information, & then the debt faces adverse selection when traded (i.e., it becomes information-sensitive). We empirically study these adverse selection dynamics in a very important asset class, collateralized loan obligations, a large symbiotic appendage of the regulated banking system, which finances loans to below investmentgrade firms.

Keywords: Safe debt, adverse selection, information sensitivity, collateralized loan obligations

DOI: https://doi.org/10.17016/FEDS.2020.088

PDF:
Full Paper



Back to Top

Last Update:
October 21, 2020

Source: Federal Reserves

Content compilation technical supported by
SEO Press Release
,Topic News PR – professional press release distribution in Japan, Korea, China, Taiwan & Asia world

Leave a Reply

Your email address will not be published. Required fields are marked *