Portfolio Liquidity and Security Design with Private Information

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    Author
    Demarzo, PM; Frankel, DM; Jin, Y
    Date
    2021-12-01
    Source Title
    The Review of Financial Studies
    Publisher
    Oxford University Press (OUP)
    University of Melbourne Author/s
    Frankel, David
    Affiliation
    Business Administration
    Metadata
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    Document Type
    Journal Article
    Citations
    Demarzo, P. M., Frankel, D. M. & Jin, Y. (2021). Portfolio Liquidity and Security Design with Private Information. Review of Financial Studies, 34 (12), pp.5841-5885. https://doi.org/10.1093/rfs/hhaa147.
    Access Status
    This item is embargoed and will be available on 2023-01-28
    URI
    http://hdl.handle.net/11343/261046
    DOI
    10.1093/rfs/hhaa147
    Abstract
    Abstract A privately informed seller seeks to liquidate a portfolio to raise cash. Each asset’s liquidity thus depends on the impact of its sale on the value of the entire portfolio. We demonstrate the importance of cross-signaling and derive sufficient conditions for a liquidity “pecking order” that determines the order of sale. For assets backed by a common pool, liquidity naturally aligns with seniority. Finally, we extend the portfolio liquidation game to consider security design and demonstrate the optimality of pooling securities and selling senior tranches or debt secured by the pool, with retention increasing in asset quality or informational asymmetry.

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