Pooling and Tranching under Belief Disagreement

49 Pages Posted: 6 Jun 2015 Last revised: 10 Jul 2019

See all articles by Juan Ortner

Juan Ortner

Boston University

Martin C. Schmalz

University of Oxford - Finance; CEPR; CESifo; European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: July 8, 2019

Abstract

We study optimal security design when issuer and market participants disagree about the characteristics of the underlying asset. We show that pooling and tranching assets can be preferable to selling optimal securities backed by individual assets: pooling can be a response to belief disagreement between issuer and investors; tranching allows the issuer to exploit belief disagreement among investors. Moreover, differences in beliefs can make pooling and tranching complements; asymmetric information alone cannot.

Keywords: Disagreement, Security Design, Optimism, Overconfidence, Pooling, Tranching, Behavioral Finance

JEL Classification: G30, G32, D84, D86

Suggested Citation

Ortner, Juan and Schmalz, Martin C., Pooling and Tranching under Belief Disagreement (July 8, 2019). Available at SSRN: https://ssrn.com/abstract=2614259 or http://dx.doi.org/10.2139/ssrn.2614259

Juan Ortner

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Martin C. Schmalz (Contact Author)

University of Oxford - Finance ( email )

United States

CEPR ( email )

London
United Kingdom

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

European Corporate Governance Institute (ECGI) ( email )

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1000 Brussels
Belgium

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