Adverse Selection Dynamics in Privately Produced Safe Debt Markets
American Economic Journal: Macroeconomics
vol. 16,
no. 1, January 2024
(pp. 441-68)
Abstract
Privately produced safe debt is designed so that there is no adverse selection in trade. But in some macro states—here, the onset of the pandemic—it becomes profitable for some agents to produce private information, and then agents face adverse selection when they trade the debt (i.e., it becomes information sensitive). We empirically study these adverse selection dynamics in a very important asset class, collateralized loan obligations (CLOs), which finance loans to below-investment-grade firms. We decompose the bid-ask spreads on the AAA bonds of CLOs into a component reflecting dealer bank balance sheet costs and the adverse selection component.Citation
Foley-Fisher, Nathan, Gary Gorton, and Stéphane Verani. 2024. "Adverse Selection Dynamics in Privately Produced Safe Debt Markets." American Economic Journal: Macroeconomics, 16 (1): 441-68. DOI: 10.1257/mac.20210383Additional Materials
JEL Classification
- D22 Firm Behavior: Empirical Analysis
- D82 Asymmetric and Private Information; Mechanism Design
- E44 Financial Markets and the Macroeconomy
- G12 Asset Pricing; Trading Volume; Bond Interest Rates
- G14 Information and Market Efficiency; Event Studies; Insider Trading
- G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
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