One area of research concerns the design and rating of asset-backed securities. This research investigates why asset-backed securities are becoming an ever more important source of financing for real estate mortgages, auto loans and consumer loans. The work demonstrates that asset-backed securities have important liquidity advantages over the underlying assets, and shows that optimal security designs will involve subordination. Another area of current research is the regulation of security markets. One paper investigates optimal investigation rules and penalties associated with insider trading.
Current work examines the role of self-regulation by exchanges.
A third research project examines the importance of influential traders and their impact on asset prices. When a full-fledged corporate bond market is present, market forces have a much greater opportunity to assert themselves, thereby reducing systemic risk and the probability of a crisis. This is because such an environment is associated with greater accounting transparency, a large community of financial analysts, respected rating agencies, a wide range of corporate debt securities and derivatives demanding sophisticated credit analysis, and efficient procedures for corporate reorganization and liquidation. In addition, the richness of available securities will tend to enhance economic welfare, and the market forces at work on the wide array of bond prices are likely to have a strong spillover effect on the health of the banking system as well. 1997-98 Research Hayne Leland Hayne Leland Business Administration Hayne Leland is Arno A. Rayner Professor of Finance and Management.