Securitization and Poisoned Bottles: The Perfect Teaching Analogy
25 Pages Posted: 27 Jan 2013
Date Written: January 18, 2013
Securitization is a difficult topic to teach. Most students have preconceived ideas about it. Some of them are quite wrong. And frequently many students feel that there is almost something like “black magic” behind the concept that one can create AAA-securities out of risky assets. Additionally, the fact that securitization played an important role in the recent financial crisis, coupled with the sturdy popularity of certain securitization vehicles, makes a strong case to teach at least the basics of securitization to undergraduates majoring in economics. In this paper the authors introduce a novel way to present the topic in the classroom. The approach is based on a combination of intuition and some elementary formulas from probability theory. The authors illustrate the approach with a simple example.
Keywords: Securitization, structured products, credit risk, credit derivatives
JEL Classification: C02, C15, G01, G17
Suggested Citation: Suggested Citation