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Working paper

Forecasting mortgage securitization risk under systemic risk and parameter uncertainty

Global Financial Crisis (2008-2009) Mortgages Home ownership Home equity Mortgage-backed security Australia
Attachment Size
apo-nid66290.pdf 2 MB

The Global Financial Crisis exposed financial institutions to severe unexpected losses in relation to mortgage securitizations and derivatives. This paper finds that risk models such as ratings are exposed to a large degree of systematic risk and parameter uncertainty. An out-of-sample forecasting exercise of the nancial crisis shows that a simple approach addressing both issues is able to produce ranges for risk measures consistent with realized losses. This explains how financial markets were taken by surprise in relation to realized losses.

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