Securitized Markets, International Capital Flows, and Global Welfare

48 Pages Posted: 13 Nov 2015 Last revised: 29 Jan 2018

See all articles by Gregory Phelan

Gregory Phelan

Williams College

Alexis Akira Toda

University of California, San Diego (UCSD) - Department of Economics

Date Written: January 28, 2018

Abstract

We study the effect of collateralized lending and securitization on international capital flows and welfare in a two-country general equilibrium model with idiosyncratic investment risk. The low-margin country (Home) endogenously supplies more safe assets and enables more risk sharing. Upon financial integration, capital flows from Foreign (high-margin country) to Home, leading to lower interest rates and a larger global supply of safe assets. Unlike in standard models with partial equity issuance, in our model Home may lose from financial integration due to the endogenous reduction in risk sharing, and aggregate shocks can generate large gross capital flows.

Keywords: collateralized loan obligations, endogenous risk sharing, global imbalances, gross international asset positions, safe assets

JEL Classification: D52, F32, F36, G11, G15, G23

Suggested Citation

Phelan, Gregory and Toda, Alexis Akira, Securitized Markets, International Capital Flows, and Global Welfare (January 28, 2018). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2689043 or http://dx.doi.org/10.2139/ssrn.2689043

Gregory Phelan (Contact Author)

Williams College ( email )

Williamstown, MA 01267
United States

Alexis Akira Toda

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
Mail Code 0508
La Jolla, CA 92093-0508
United States

HOME PAGE: http://https://sites.google.com/site/aatoda111/

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