Loan-level Disclosure and the Convenience Yield of Asset-Backed Securities

We examine the impact of transparency on the convenience yield of AAA-rated asset-backed security (ABS) tranches. AAA tranches of ABS are commonly held by investors to manage financial liquidity and therefore enjoy a price premium beyond what is determined solely by the expected monetary payoff (i.e., convenience yield). The Securities and Exchange Commission (SEC) requires ABS issuers to provide monthly disclosures about the performance of the underlying individual loans for ABS issued after November 23, 2016 to improve transparency. We document that AAA tranches of ABS experience a significant increase in price volatility after the loan-level disclosure mandate. As a result, the use of these tranches as collateral for short-term funding and their convenience yield decrease significantly after the increased disclosure. Our collective evidence highlights an important unintended consequence of increased transparency in the ABS market; it diminishes the pledgeability of long-term safe assets.

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Work Title Loan-level Disclosure and the Convenience Yield of Asset-Backed Securities
Access
Open Access
Creators
  1. Brent Schmidt
  2. Haiwen Zhang
Keyword
  1. convenience yield
  2. loan-level disclosure
  3. asset-backed securities
License In Copyright (Rights Reserved)
Work Type Article
Publisher
  1. American Accounting Association
Publication Date September 2024
Publisher Identifier (DOI)
  1. https://doi.org/10.2308/TAR-2022-0245
Deposited September 04, 2024

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Version 1
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  • Created
  • Updated
  • Updated Description, Publication Date Show Changes
    Description
    • We examine the impact of transparency on the convenience yield of AAA-rated asset-backed security (ABS) tranches. AAA tranches of ABS are commonly held by investors to manage financial liquidity and therefore enjoy a price premium beyond what is determined solely by the expected monetary payoff (i.e., convenience yield). The Securities and Exchange Commission (SEC) requires ABS issuers to provide monthly disclosures about the performance of the underlying individual loans for ABS issued after November 23, 2016 to improve transparency. We document that AAA tranches of ABS experience a significant increase in price volatility after the loan-level disclosure mandate. As a result, the use of these tranches as collateral for short-term funding and their convenience yield decrease significantly after the increased disclosure. Our collective evidence highlights an important unintended consequence of increased transparency in the ABS market; it diminishes the pledgeability of long-term safe assets.
    Publication Date
    • 2024-09
  • Added Creator Brent Schmidt
  • Added Creator Haiwen Zhang
  • Added Manuscript.pdf
  • Updated License Show Changes
    License
    • https://rightsstatements.org/page/InC/1.0/
  • Published
  • Updated
  • Updated Keyword Show Changes
    Keyword
    • convenience yield, loan-level disclosure, asset-backed securities
  • Updated Publisher, Publisher Identifier (DOI) Show Changes
    Publisher
    • American Accounting Association
    Publisher Identifier (DOI)
    • https://doi.org/10.2308/TAR-2022-0245