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The Economics of Structured Finance

Joshua D. Coval
Harvard Business School; National Bureau of Economic Research (NBER)

Jakub W. Jurek
Princeton University - Bendheim Center for Finance

Erik Stafford
Harvard Business School


October 20, 2008

Harvard Business School Finance Working Paper No. 09-060

Abstract:     
The essence of structured finance activities is the pooling of economic assets (e.g. loans, bonds, mortgages) and subsequent issuance of a prioritized capital structure of claims, known as tranches, against these collateral pools. As a result of the prioritization scheme used in structuring claims, many of the manufactured tranches are far safer than the average asset in the underlying pool. We examine how the process of securitization allowed trillions of dollars of risky assets to be transformed into securities that were widely considered to be safe, and argue that two key features of the structured finance machinery fueled its spectacular growth. At the core of the recent financial market crisis has been the discovery that these securities are actually far riskier than originally advertised.

Keywords: CDO, Structured Finance, Rating Agency

JEL Classifications: G1

Working Paper Series

Date posted: October 22, 2008 ; Last revised: February 18, 2009

Suggested Citation

Coval, Joshua D., Jurek, Jakub W. and Stafford, Erik, The Economics of Structured Finance (October 20, 2008). Harvard Business School Finance Working Paper No. 09-060. Available at SSRN: http://ssrn.com/abstract=1287363


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Contact Information

Erik Stafford (Contact Author)
Harvard Business School ( email )
Boston, MA 02163
United States
617-495-8064 (Phone)
617-496-7357 (Fax)
Joshua D. Coval
Harvard Business School ( email )
Boston, MA 02163
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Jakub W. Jurek
Princeton University - Bendheim Center for Finance ( email )
26 Prospect Avenue
Princeton, NJ 08540
United States
(609) 258-4037 (Phone)
HOME PAGE: http://www.princeton.edu/~jjurek
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