Credit Risk, Informed Markets, and Securitization
23 Pages Posted: 12 Jan 2018
Date Written: January 11, 2018
Mortgage backed securities (MBS) funded the US housing bubble, while the bust resulted in systemic risk and the Global Financial Crisis. The pricing of MBS and the ABX securitization index failed to reveal growing credit risk. This paper draws lessons from this failure for the use of Credit Risk Transfers (CRT) to price credit risk. The central question is would the CRT market, as constituted today, have behaved differently than financial asset markets in the bubble years? If no, then this is a problem. If yes, then why?
Keywords: MBS, CRT, Credit Risk Transfer, Securitization, Financial Crisis, Recession
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