THIN MARKETS, ASYMMETRIC INFORMATION, AND MORTGAGE-BACKED SECURITIES

This paper tries to explain why the issuers of an asset would restrict what information is available about their asset. In a world where kno wledge is valued, market forces should induce disclosure, but we often see markets (such as the market for mortgage-backed securities) where assets' issuers refuse to release valuable information. We present a model of market liquidity and find that market liquidity can both rise and fall with the quantity of released information. More information may increase asymmetries of information add ''lemons'' style breakdown s. We find that asset bundling is more advantageous when private infor mation is more accurate, which may be the case in the mortgage-backed securities market. Journal of Economic Literature Classification Numbe rs: G14, G32. (C) 1997 Academic Press.