Discussion paper

DP12591 Are Lemons Sold First? Dynamic Signaling in the Mortgage Market

A central result in the theory of adverse selection in asset markets is that informed sellers can
signal quality and obtain higher prices by delaying trade. This paper provides some of the first
evidence of a signaling mechanism through trade delays using the residential mortgage market
as a laboratory. We find a strong relationship between mortgage performance and time to sale
for privately securitized mortgages. Additionally, deals made up of more seasoned mortgages
are sold at lower yields. These effects are strongest in the "Alt-A" segment of the market, where
mortgages are often sold with incomplete hard information, and in cases where the originator
and the issuer of mortgage-backed securities are not affliated.

£6.00
Citation

Adelino, M and K Gerardi (2018), ‘DP12591 Are Lemons Sold First? Dynamic Signaling in the Mortgage Market‘, CEPR Discussion Paper No. 12591. CEPR Press, Paris & London. https://cepr.org/publications/dp12591