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Federal Reserve Bank of Atlanta
FRB Atlanta Working Paper
Are Lemons Sold First? Dynamic Signaling in the Mortgage Market
Manuel Adelino
Kristopher S. Gerardi
Barney Hartman-Glaser
Abstract

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 affiliated.


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Manuel Adelino & Kristopher S. Gerardi & Barney Hartman-Glaser, Are Lemons Sold First? Dynamic Signaling in the Mortgage Market, Federal Reserve Bank of Atlanta, FRB Atlanta Working Paper 2016-8, 01 Jul 2016, revised 01 Mar 2018.
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Keywords: mortgage markets; asymmetric information; signaling
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