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Senior-subordinated structure: Buffer or signal in securitisation?

Filomeni, Stefano and Baltas, Konstantinos (2022) 'Senior-subordinated structure: Buffer or signal in securitisation?' The European Journal of Finance. pp. 1-34. ISSN 1351-847X (In Press)

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Abstract

By exploiting a unique and proprietary dataset comprising granular deal- and tranche-level data on a global portfolio of securitisation deals, we empirically test the buffer vs the signalling hypothesis of credit enhancements in securitisation. We do so by focusing on one internal credit enhancement associated with the design of financial securities in securitisation, i.e., subordination. This study provides novel evidence on the role played by subordination in securitisation, suggesting that a real dichotomy between the buffer and signalling effects does not hold. Our findings indeed highlight that subordination serves both as a buffer against observable risk and as a signal of unobservable credit quality to third-party investors in the market; moreover, our results are robust to a wide battery of robustness tests. Our findings, of international relevance, contribute to the literature on information asymmetries between originators and investor and offer new policy insights in light of the recent agreement reached by European lawmakers with national governments to revive the European securitisation market.

Item Type: Article
Uncontrolled Keywords: Securitisation; Subordination; Buffer; Signalling; Delinquency; Rating; Mortgage market
Divisions: Faculty of Social Sciences
Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
SWORD Depositor: Elements
Depositing User: Elements
Date Deposited: 27 Apr 2022 08:32
Last Modified: 27 Apr 2022 08:34
URI: http://repository.essex.ac.uk/id/eprint/32437

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