VGSF - WU Vienna - LC

Kathy Yuan, London School of Economics

Campus WU D3.0.225 11:00 - 12:30

Organizer VGSF

As part of the ser­ies of the "Fin­ance Re­search Sem­inar", VGSF wel­comes Kathy Yuan from the Lon­don School of Eco­nom­ics to present her re­search pa­per.
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Dy­namic Li­quid­ity-­based Se­cur­ity Design

We study a dy­namic prob­lem of the design and sale of a se­cur­ity backed by a pro­duct­ive as­set. The re­turn on the as­set may be high or low. The is­suers are privately in­formed about the qual­ity of the as­set, and raise cap­ital by se­cur­it­iz­ing part of it. Is­suers can pledge not only the cur­rent period pay­off from the as­sets, but also the fu­ture re-sell prices which de­pends on in­ter­-tem­poral co­ordin­a­tion. Both ad­verse se­lec­tion and in­ter­-tem­poral co­ordin­a­tion de­termine the li­quid­ity of the se­cur­ity. We show that when only equity con­tracts can be is­sued, mul­tiple dy­namic - li­quid and il­li­quid - equi­lib­ria might ar­ise. We fur­ther char­ac­ter­ize the op­timal se­cur­ity design and demon­strate stand­ard li­quid debt is op­timal and elim­in­ates the mul­tiple equi­lib­ria fra­gil­ity. In fact, the unique equi­lib­rium un­der debt con­tract im­proves so­cial wel­fare re­l­at­ive to the il­li­quid equity equi­lib­rium. 

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