Strategic Trade when Securitized Portfolio Values Are Unknown
102 Pages Posted: 21 Jun 2017 Last revised: 24 Aug 2020
Date Written: June 2020
Abstract
I examine the effect that the precision of securitization has on the market
quality of the underlying asset, as well as focus on the market quality of the
derivative asset. With securitization, the underlying portfolio has improved liquidity, the trading intensity of an informed trader is increased, and the informed
trader’s expected profit is increased. When arbitrageurs are discretionary, jumps
in illiquidity can occur. The combination of the underlying portfolio and derivative portfolio prices are revealing about the unknown liquidation value of the
underlying portfolio and the derivative price is also revealing about the unknown
tracking error.
Keywords: Strategic trade, Market microstructure, Securitization, Price discovery
JEL Classification: G12, G13, G14
Suggested Citation: Suggested Citation