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

This paper examines the impact of mandatory loan-level disclosure on the convenience yield of AAA-rated asset-backed securities. Relying on the put-call parity relationship to estimate the daily risk-free interest rate unaffected by the convenience features of safe assets, we first show that the average bond yield for AAA-rated ABS is consistently below the risk-free rate, suggesting a convenience yield exists for these assets. We then find that, using non-AAA rated ABS issued by the same trusts, backed by the same underlying loan portfolios, and traded in the same month as a control group, the average difference between the risk-free rate and yield of AAA-rated ABS (Box spread) decreases by approximately 50% after the mandatory loan-level disclosures. This result is stronger when the quality of loan-level disclosure is high, when the price of bonds subject to loan-level disclosure is volatile, and when the ABS market is tight. Corroborating our main results, we also find AAA-rate ABS subject to loan-level disclosure requirement is less likely to serve as collateral in the tri-party repo market. Overall, our paper provides novel evidence supporting recent theoretical developments that increased transparency reduces pledgeability, and thus the convenience yield of safe assets.