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Securitized Products, Financial Regulation, and Systemic Risk

  • Mariko Fujii

    (Asian Development Bank Institute)

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    It is widely believed that the practice of securitization is one of the causes that led to the 200708 financial crisis. In this paper, I show that securitized products such as collateralized debt obligations (CDO) are particularly vulnerable to systematic risk and tend to show higher tail risk. These characteristics, in turn, are closely associated with joint failures and systemic risk. In order to achieve greater stability of the financial system, it is important to prevent the recurrence of the collapse of specific markets as this may lead to the collapse of other components of the financial system. From this perspective, the financial regulations that should be applied to these problematic financial products and their relation to possible systemic risks are discussed.

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    File URL: http://130.56.61.71/node/23010
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    Paper provided by East Asian Bureau of Economic Research in its series Finance Working Papers with number 23010.

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    Date of creation: Jan 2010
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    Handle: RePEc:eab:financ:23010
    Contact details of provider: Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200
    Web page: http://www.eaber.org

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    1. Douglas W. Diamond & Raghuram Rajan, 2009. "The Credit Crisis: Conjectures about Causes and Remedies," NBER Working Papers 14739, National Bureau of Economic Research, Inc.
    2. Benmelech, Efraim & Dlugosz, Jennifer, 2009. "The alchemy of CDO credit ratings," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 617-634, July.
    3. Peter M. DeMarzo, 2005. "The Pooling and Tranching of Securities: A Model of Informed Intermediation," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 1-35.
    4. Francis A. Longstaff & Arvind Rajan, 2008. "An Empirical Analysis of the Pricing of Collateralized Debt Obligations," Journal of Finance, American Finance Association, vol. 63(2), pages 529-563, 04.
    5. Joshua Aizenman, 2009. "Financial Crisis and the Paradox of Under- and Over-Regulation," NBER Working Papers 15018, National Bureau of Economic Research, Inc.
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