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Securitization of Mortgage Debt, Asset Prices and International Risk Sharing

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  • Mathias Hoffmann
  • Thomas Nitschka

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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Bibliographic Info

Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 376.

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

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

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Cited by:
  1. Markus Leibrecht & Johann Scharler, 2010. "Banks, Financial Markets and International Consumption Risk Sharing," Economics working papers, Department of Economics, Johannes Kepler University Linz, Austria 2010-15, Department of Economics, Johannes Kepler University Linz, Austria.
  2. Sa, Filipa & Towbin, Pascal & wieladek, tomasz, 2011. "Low interest rates and housing booms: the role of capital inflows, monetary policy and financial innovation," Bank of England working papers, Bank of England 411, Bank of England.

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