Portal de Periódicos da CAPES

A Liquidity-based Model of Security Design

1999; Wiley; Volume: 67; Issue: 1 Linguagem: Inglês

10.1111/1468-0262.00004

1468-0262

Peter M. DeMarzo, Darrell Duffie,

Auction Theory and Applications

EconometricaVolume 67, Issue 1 p. 65-99 A Liquidity-based Model of Security Design Peter Demarzo, Peter Demarzo Haas School of Business, University of California, USA,Search for more papers by this authorDarrell Duffie, Darrell Duffie Stanford Graduate School of Business, Stanford University, USASearch for more papers by this author Peter Demarzo, Peter Demarzo Haas School of Business, University of California, USA,Search for more papers by this authorDarrell Duffie, Darrell Duffie Stanford Graduate School of Business, Stanford University, USASearch for more papers by this author First published: 09 December 2003 https://doi.org/10.1111/1468-0262.00004Citations: 454AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Abstract We consider the problem of the design and sale of a security backed by specified assets. Given access to higher-return investments, the issuer has an incentive to raise capital by securitizing part of these assets. At the time the security is issued, the issuer's or underwriter's private information regarding the payoff of the security may cause illiquidity, in the form of a downward-sloping demand curve for the security. The severity of this illiquidity depends upon the sensitivity of the value of the issued security to the issuer's private information. Thus, the security-design problem involves a tradeoff between the retention cost of holding cash flows not included in the security design, and the liquidity cost of including the cash flows and making the security design more sensitive to the issuer's private information. We characterize the optimal security design in several cases. We also demonstrate circumstances under which standard debt is optimal and show that the riskiness of the debt is increasing in the issuer's retention costs for assets. Citing Literature Volume67, Issue1January 1999Pages 65-99 RelatedInformation