Forecasting Mortgage Securitization Risk Under Systematic Risk and Parameter Uncertainty

24 Pages Posted: 20 Aug 2014

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 2014

Abstract

The global financial crisis exposed financial institutions to severe unexpected losses in relation to mortgage securitizations and derivatives. This article 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.

Suggested Citation

Roesch, Daniel and Scheule, Harald, Forecasting Mortgage Securitization Risk Under Systematic Risk and Parameter Uncertainty (September 2014). Journal of Risk and Insurance, Vol. 81, Issue 3, pp. 563-586, 2014, Available at SSRN: https://ssrn.com/abstract=2483533 or http://dx.doi.org/10.1111/j.1539-6975.2013.12009.x

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

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