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A note on the subprime mortgage crisis: dynamic modelling of bank leverage profit under loan securitization

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  • Mark Adam Petersen
  • Mmboniseni Phanuel Mulaudzi
  • Janine Mukuddem-Petersen
  • Ilse Schoeman

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 Levy 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.

Suggested Citation

  • Mark Adam Petersen & Mmboniseni Phanuel Mulaudzi & Janine Mukuddem-Petersen & Ilse Schoeman, 2010. "A note on the subprime mortgage crisis: dynamic modelling of bank leverage profit under loan securitization," Applied Economics Letters, Taylor & Francis Journals, vol. 17(15), pages 1469-1474.
    • Handle: RePEc:taf:apeclt:v:17:y:2010:i:15:p:1469-1474
    DOI: 10.1080/13504850903035907
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