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

ABSTRACT 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. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G14; G23; M48.