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Securitization of Mortgage Debt, Asset Prices and International Risk Sharing

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Author Info
Mathias Hoffmann
Thomas Nitschka

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Abstract

We explore the impact of mortgage securitization on the international diversification of macroeconomic risk. By making mortgage-related risks internationally tradeable, securitization contributes considerably to better international consumption risk sharing: we find that countries with the most highly developed markets for securitized mortgage debt have consumption responses to a typical idiosyncratic business cycle shock that are 20-30 percent less volatile than those experienced by countries that do not allow for mortgage securitization. Our results are based on quarterly data from a panel of 16 industrialized countries and cover the sample period 1985-2008Q1. They are robust to a range of controls for other aspects of financial globalization, international differences in the structure of housing markets and the financial system etc. Against the backdrop of the subprime crisis, these findings inevitably raise the question whether securitization could not just facilitate risk sharing in tranquil times but that it actually fails to provide international insurance in severe crisis periods. Indeed, we find that international risk sharing decreases in global asset price downturns and increases in booms. But we do not find evidence that countries with more developed securitization markets are systematically more exposed to these fluctuations in the extent to which risk can be shared across national boundaries.

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Paper provided by Institute for Empirical Research in Economics - IEW in its series IEW - Working Papers with number iewwp376.

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Date of creation: Dec 2008
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Handle: RePEc:zur:iewwpx:376

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Related research
Keywords: Financial globalization; international risk sharing; home bias; securitization; mortgage markets; asset prices; international business cycles;

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Find related papers by JEL classification:
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

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