Working Paper

Ambiguity in Securitization Markets

Abstract: During the financial crisis of 2008, origination and trading in asset-backed securities markets dropped dramatically. I present a model with ambiguity averse investors to explain how such a market freeze could occur and to investigate how ambiguity affects origination and securitization decisions. The model captures many features of the crisis, including market freezes and fire sales, as well as the timing and duration of the freeze. The presence of ambiguity also reduces real economic activity. Lastly, I consider the differing implications of ambiguity and risk, as well as the role of policies that reduce ambiguity during market freezes.

Keywords: Structured finance; ambiguity aversion; market freezes;

JEL Classification: E44; G01; G21; G28;

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2015-05-13

Number: 2015-33

Pages: 51 pages