Business Economics and Public Policy Papers

Document Type

Journal Article

Date of this Version

10-2016

Publication Source

The Geneva Papers on Risk and Insurance - Issues and Practice

Volume

41

Issue

4

Start Page

650

Last Page

676

DOI

10.1057%2Fs41288-016-0021-4

Abstract

It has been argued that the opaqueness of structured bonds, such as mortgage-backed securities, asset-backed securities and collateral debt obligations, was one of the major causes of the recent financial crisis that started in late 2007. We analyse the evolving nature of information asymmetry inherent in various types of structured bonds by examining the U.S. insurers’ assets. We show that, prior to 2004, structured bonds were not associated with greater information asymmetry; however, holding more multi-class structured bonds, especially privately placed bonds, increased the information asymmetry when evaluating insurers’ assets post-2004. The effect of information asymmetry was more significant with life insurers than with non-life insurers. In addition, by investigating the rating grades of such structured bonds, we find that the market views higher-grade, privately placed, multi-class structured bonds as having the highest information asymmetry among all types of structured bonds post 2004, an effect which is, again, more significant with life insurers. This result shows that structuring complexities and unreliable ratings make structured bonds more opaque than just securitisation itself.

Copyright/Permission Statement

The final publication is available at Springer via http://dx.doi.org/10.1057%2Fs41288-016-0021-4

Keywords

structured bonds, information asymmetry, insurance, bid–ask spread, financial crisis

Embargo Date

9-15-2017

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Date Posted: 27 November 2017

This document has been peer reviewed.