TY  - JOUR
AU  - Gorton,Gary
AU  - Pennacchi,George
TI  - Security Baskets and Index-Linked Securities
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 3711
PY  - 1991
Y2  - May 1991
UR  - http://www.nber.org/papers/w3711
L1  - http://www.nber.org/papers/w3711.pdf
N1  - Author contact info:
Gary B. Gorton
Yale School of Management
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
Fax: 203/432-8931
E-Mail: Gary.Gorton@yale.edu

George Pennacchi
College of Business
University of Illinois
4041 BIF, Box 25, MC520
515 E. Gregory Drive
Champaign, IL 61820
Tel: 2172440952
Fax: 2172443102
E-Mail: gpennacc@illinois.edu
AB  - Security baskets and index-lined securities are securities whose values are functions of the cash flows or values of other assets. Creation of these "composite" securities would seem to be redundant since investors can cost1ess1y replicate them. In this paper we study the existence and optimal design of composite securities. We first show that when some investors possess inside information, composite securities are not redundant. By holding composite securities, uninformed investors with unexpected needs to trade can reduce their expected losses to insiders. The existence of these securities will affect real investment decisions. We then show that when uniformed investors are heterogeneous with respect to nontradeable endowment risk, the size of such clienteles determines whether the portfolio for a liquidity trader consists of a clientele-specific composite or a single market composite combined with individual security holdings. In the latter case, markets for the composite security and its component securities coexist. No results depend on the existence of exogenous "noise" traders.
ER  -