Financial markets have experienced several episodes of ?liquidity crises? over the past 20 years. One prominent example is the collapse of the Long Term Capital Management hedge fund in 1998. The recent market disruption brought about by the downturn in subprime mortgages also shares many features with liquidity crises. What is liquidity? Why does it sometimes seem that the market?s supply of it is insufficient? Can anything be done about it? In ?Liquidity Crises,? Ronel Elul outlines some theories of market liquidity provision, how it breaks down in times of crisis, and some possible ...
The government-sponsored enterprises: past and future
Fannie Mae and Freddie Mac's role in the housing bubble and financial crisis remains controversial. Did they precipitate or at least worsen the crisis? How do their benefits compare against their losses? Ronel Elul traces their evolution and actions and outlines reform proposals.
What have we learned about mortgage default?
By the end of 2009, one out of every 11 mortgages was seriously delinquent or in foreclosure. Economists have devoted considerable energy over the past several years to understanding the underlying causes of this increase in defaults. One goal is to provide a guide to dealing with the existing problems. In addition, a better understanding may help avoid future problems. In ?What Have We Learned About Mortgage Default?? Ronel Elul reviews recent research that has shed light on two areas: the extent to which securitization is responsible for the increase in default rates; and the relative ...
Short-selling, the practice of selling a security the seller does not own, is done in an attempt to profit from an expected decline in the price of the security. During the recent financial turmoil, many press accounts blamed short-selling for declines in stock prices and even for the collapse of some firms. In "Regulating Short-Sales," Ronel Elul discusses the issue of short-selling. He notes that research has shown that short-selling plays a valuable role in setting accurate prices for securities but that it can also be used to facilitate market manipulation. This latter consideration ...
Cyclicality and the Severity of the U.S. Supervisory Stress Test: 2014 to 2018
In this study, we provide a measure of the severity of the 2014-2018 US supervisory stress tests, and examine how that severity measure has evolved.
Residential mortgage default
In ?Residential Mortgage Default,? Ronel Elul discusses the models that economists have developed to help us understand the default risk inherent in home mortgages and how default risk and house prices are related. He also applies these models to show how falling house prices would affect mortgage default rates today and explores the impact that rising default rates would have on financial institutions and other participants in the mortgage market. ; Also issued as Payment Cards Center Discussion Paper No. 06-10
The economics of asset securitization
Ronel Elul explains why asset-backed securities exist and discusses some reasons for their common structure. Elul notes that despite well-developed theories on the what and why of securitization, more research is needed. In particular, additional research could uncover the effect that government regulation and bankruptcy law have on securitization.
The promise and challenges of bank capital reform
The failure and bailout of some prominent financial institutions amid the crisis of 2007-09, and the effect these events had on the economy as a whole, have led policymakers to rethink how the global financial system is regulated. These changes, commonly known as the Basel III Accords, will require banks to maintain more capital in reserve, hold higher-quality capital, and assign greater risk weights to certain types of assets.
Understanding house price index revisions
Residential house price indexes (HPI) are used for a large variety of macroeconomic and microeconomic research and policy purposes, as well as for automated valuation models. As is well known, these indexes are subject to substantial revisions in the months following the initial release, both because transaction data can be slow to come in, and as a consequence of the repeat sales methodology, which interpolates the effect of sales over the entire period since the house last changed hands. We study the properties of the revisions to the CoreLogic House Price Index. This index is used both by ...
Bankruptcy exemptions, credit history, and the mortgage market.
We develop and test a model of mortgage underwriting, with particular reference to the role of credit bureau scores. In our model scores are used in a standardized fashion, which reflects the prevalence of automated underwriting in industry practice. We show that our model has implications for the debate on the effect of personal bankruptcy exemptions on secured lending. Recent literature (Berkowitz and Hynes (1999), Lin and White (2001)) has developed conflicting theories?and found conflicting results?seeking to explain how exemptions affect the mortgage market. ; By contrast, our model ...