Controlling information premia by repackaging asset-backed securities

Securities created from a base of underlying receivables are sold to uninformed "individual" and "institutional" hedgers. Institutions are more sophisticated than individuals because they are aware of the information-based transactions costs of all currently open markets and minimize transaction costs by trading in optimal portfolios. We show that profits earned from individuals can be optimized by changing the correlation coefficient between sets of receivables backing different securities, but profits earned from institutions are immune to changes in the correlation and can be controlled only by altering the number of securities created.