Downturn Risk: Another View on the Current Financial Crisis
15 Pages Posted: 19 Mar 2011
Date Written: March 14, 2011
The current financial crisis had its origins in the US subprime mortgage market and led to downturns in global equity, credit and commodity markets. This paper identifies the lack of economic information in risk valuation models as one reason why the financial industry was unable to predict, mitigate and cover the current losses. This is at first sight rather surprising as credit and credit derivative products have existed for centuries. However, the markets have experienced an exponential growth in size as well as variety. In particular, the associated transparency may have not matched this development in relation to the underlying risks, risk models and model risks.
Keywords: Credit Portfolio Risk, Economic Downturn, Financial Crisis, Model Risk, Securitization
JEL Classification: G20, G28, C51
Suggested Citation: Suggested Citation