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Journals
Cheapest to Deliver Pricing Optimal Mbs Securitization and Welfare Implications
Resource type
Authors/contributors
- Huh, Yesol (Author)
- Kim, You Suk (Author)
Title
Cheapest to Deliver Pricing Optimal Mbs Securitization and Welfare Implications
Abstract
We study optimal securitization in the agency mortgage-backed securities (MBS) market. Many MBS are traded in the liquid to-be-announced (TBA) market, which however induces adverse selection due to cheapest-to-deliver pricing. We find that lenders pool high-value loans separately and trade them in a less liquid market. We estimate a model of MBS pooling and trading to study welfare implications of pooling policies. TBA market structure produces a trade-off between efficiency and equity; broader pooling increases liquidity and average welfare, but results in a larger cross-subsidy from smaller loans to larger loans. Minimizing costs or limiting strategic pooling results in a more regressive redistribution.
Publication
Journal of Financial Economics
Volume
150
Issue
S0304405X23001228
Pages
68-93
Date
2023
Citation
Huh, Y., & Kim, Y. S. (2023). Cheapest to Deliver Pricing Optimal Mbs Securitization and Welfare Implications. Journal of Financial Economics, 150, 68–93.
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