A note on the subprime mortgage crisis: dynamic modelling of bank leverage profit under loan securitization
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Petersen, Mark Adam
Mulaudzi, Mmboniseni Phanuel
Mukuddem-Petersen, Janine
Schoeman, Ilse
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Taylor & Francis
Abstract
In this brief research article, we consider the financial modelling of the process of mortgage loan securitization that has been a root cause of the ongoing Subprime Mortgage Crisis (SMC). In particular, we suggest a Lévy process-driven model of bank leverage profit that arises from the securitization of a pool of subprime mortgage loans. To achieve this, we develop stochastic models for mortgage loans, mortgage loan losses, credit ratings and mortgage loan guarantees in a subprime context. These models incorporate some of the most important issues related to the SMC and its causes. Finally, we provide a brief analysis of the models developed earlier in our contribution and its relationship with the SMC
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Citation
Petersen, M.A. et al. 2010. A note on the subprime mortgage crisis: dynamic modelling of bank leverage profit under loan securitization. Applied economics letters, 17(15):1466-4291. [http://dx.doi.org/10.1080/13504850903035907]