Forecasting Mortgage Securitization Risk under Systematic Risk and Parameter Uncertainty

Journal of Risk and Insurance, 81, 2013, 563-586

CIFR Paper No. 009/2014

39 Pages Posted: 30 Oct 2013 Last revised: 19 Nov 2015

See all articles by Daniel Roesch

Daniel Roesch

University of Regensburg

Harald (Harry) Scheule

University of Technology Sydney (UTS) - School of Finance and Economics; Financial Research Network

Date Written: September 26, 2012

Abstract

The Global Financial Crisis exposed financial institutions to severe unexpected losses in relation to mortgage securitizations and derivatives. This paper analyzes a unique and extensive ratings and impairment events database for securitizations. The paper finds that risk models such as ratings are exposed to a large degree of systematic risk and parameter uncertainty. An out-of-sample forecasting exercise of the financial crisis shows that a simple approach addressing both issues is able to produce ranges for risk measures consistent with realized losses. This explains how financial markets were taken by surprise in relation to realized losses.

Keywords: Economic Capital, Global Financial Crisis, Home Equity Loan Security, Mortgage-backed Security, Parameter Uncertainty, Rating, Securitization, Systematic Risk, Value-at-Risk

JEL Classification: G20, G28, C51

Suggested Citation

Roesch, Daniel and Scheule, Harald, Forecasting Mortgage Securitization Risk under Systematic Risk and Parameter Uncertainty (September 26, 2012). Journal of Risk and Insurance, 81, 2013, 563-586, CIFR Paper No. 009/2014, Available at SSRN: https://ssrn.com/abstract=2347297

Daniel Roesch (Contact Author)

University of Regensburg ( email )

Chair of Statistics and Risk Management
Faculty of Business, Economics and BIS
Regensburg, 93040
Germany

HOME PAGE: http://www-risk.ur.de/

Harald Scheule

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

P.O. Box 123
Broadway, NSW 2007
Australia

HOME PAGE: http://https://www.uts.edu.au/staff/harald.scheule

Financial Research Network ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
99
Abstract Views
952
rank
304,622
PlumX Metrics