An Overview of mortgage securitization and the financial crisis.

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Presentation transcript:

An Overview of mortgage securitization and the financial crisis

Borrower Originator Issuer/ SIV Rating Agency Investor Lemon Loan, Hot Potato Theory “Off Balance Sheet “ SIV, Bankruptcy Remote, True Sale, Credit Enhancement (Why/Types), Tranches, CDO(Types) Gaussian Copula

 Blamed as culprit in the credit crunch. Correlation Gaussian Copula Joint CDF

Where CDF = Cumulative Distribution Function Returns Distribution

Returns Distribution Where CDF = Cumulative Distribution Function

Returns Distribution Where CDF = Cumulative Distribution Function

Too many simplifying assumptions  Normally distributed return.  Correlation is not always flat and constant.  Same kind of MBS securities involved in securitization were directly correlated not inversely correlated.

 Cost of Credit Securitization rate is inversely proportion with yield spread  Dispersion of risk Monetary policy shocks have negative and significant impact on banks loan growth.  Contagion or transmission of risks to cross markets.

 2dEM 2dEM

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