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Ambiguity In Securitization Markets
During the financial crisis of 2008, origination and trading in asset-backed securities markets dropped dramatically. This dissertation considers the role that ambiguity can play in such a market freeze both theoretically and empirically. I first present a theoretical model with ambiguity averse investors to explain how such a market freeze could occur and to investigate how ambiguity affects both origination and securitization decisions. The model captures many features of the crisis, including market freezes and fire sales, as well as the timing and duration of the crisis. In addition to impacting financial markets, the presence of ambiguity also reduces real economic activity, both when ambiguity is expected and, even more so, once it has been realized. Lastly, I consider the differing implications of ambiguity and risk, as well as the role of policies that help reduce ambiguity during market freezes. The empirical section of this dissertation analyzes the interdependent roles of risk, ambiguity, and leverage in determining both the structure of securitization tranches and the effectiveness of the Term Asset-Backed Securities Loan Facility (TALF) during the 2008 financial crisis. During the crisis, securitization deals have larger safe tranches and fewer tranches per deal, suggesting a need to reduce the complexity and ambiguity of these securities. I test differences between tranches funded by TALF and those not to examine the interplay between securitization structure and the benefits of TALF in terms of reducing risk, reducing ambiguity, and increasing participation through the provision of leverage. I find that, while there is support of all three of these channels, the roles of reducing ambiguity and increasing leverage are most significant.
Easley, David Alan; Karolyi, George Andrew
Ph.D. of Management
Doctor of Philosophy
dissertation or thesis