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Mortgage Securitization and Risk ∗ (2003)
BibTeX
@MISC{Lehnert03mortgagesecuritization,
author = {Andreas Lehnert and Wayne Passmore and Mortgage Securitization},
title = {Mortgage Securitization and Risk ∗},
year = {2003}
}
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Abstract
Securitization is typically seen as a risk-sharing technique; less attention is paid to how risk types affect the equilibrium and optimal secondary market sizes. We use a standard equilibrium model with spatial differentiation to characterize the effects of different risk types on secondary markets and ultimate mortgage borrowers. We find that: (1) Market risks (e.g. liquidity and origination risk) increase secondary market trading volume but do not necessarily lead to securitization per se; (2) Idiosyncratic risks (e.g. credit risk) do lead to securitization as well as increasing secondary market volume; and (3) Aggregate risks (e.g. prepayment risks) tend to decrease secondary market volume. Also, some secondary markets are fragmented while others are highly standardized. We provide conditions for the equilibrium emergence of a single secondary market, and for the optimality of such a market.
Keyphrases
mortgage securitization secondary market volume secondary market single secondary market risk type aggregate risk standard equilibrium model idiosyncratic risk equilibrium emergence market risk optimal secondary market size different risk type spatial differentiation risk-sharing technique prepayment risk increase secondary market trading volume credit risk origination risk ultimate mortgage borrower
