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Stéphane VERANI (Board of Governors of the Federal Reserve System) “Adverse Selection Dynamics in Privately-Produced Safe Debt Markets “
The Macroeconomics Seminar:
Time: 12:15 pm – 13:30 pm
Date: 16 th of February 2022
Stéphane VERANI (Board of Governors of the Federal Reserve System) “Adverse Selection Dynamics in Privately-Produced Safe Debt Markets ”
Abstract :Privately-produced safe debt is designed so that there is no adverse selection in trade. But in some macro states, here the onset of the pandemic, it becomes profitable for some agents to produce private information, and then agents face adverse selection when they trade the debt (i.e., it becomes information-sensitive). We empirically study these adverse selection dynamics in a very important asset class, collateralized loan obligations (CLOs), which finance loans to below investment-grade firms. We decompose the bid-ask spreads on the AAA bonds of CLOs into a component reflecting dealer bank balance sheet costs and the adverse selection component.
Joint work : Nathan Foley-Fisher and Gary Gorton
Pierre BOYER (CREST-Polytechnique)