Boom-Bust Cycles: Leveraging, Complex Securities, and Asset Prices

Willi Semmler and Lucas Bernard

DEGIT Conference Papers from DEGIT, Dynamics, Economic Growth, and International Trade

Abstract: Recent history suggests that many boom-bust cycles are naturally driven by linkages between the credit market and asset prices. Additionally, new structured securities have been developed, e.g., MBS, CDOs, and CDS, which have acted as instruments of risk transfer. We show that there is a certain non-robustness in the pricing of these instruments and we create a model in which their role in the recent financial market meltdown, and in which the mechanism by which they exacerbate leverage cycles, is explicit. We first discuss the extent to which complex securities can amplify boom-bust cycles. Then, we propose a model in which distinct financial market boom-bust cycles emerge naturally. We demonstrate the interaction of leveraging and asset pricing in a dynamical model and spell out some implications for monetary policy.

Keywords: Credit; Leverage; Mortgage; Credit Risk; Structured Finance; Leveraged Financing; Mortgage-backed Security; Collateral; Collateralized Default Obligation; Booms; Busts; Dynamic; Cycles (search for similar items in EconPapers)
JEL-codes: C61 C63 D83 D92 G21 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2011-09
New Economics Papers: this item is included in nep-ban, nep-cba and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://degit.sam.sdu.dk/papers/degit_16/c016_034.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to degit.sam.sdu.dk:80 (No such host is known. )

Related works:
Journal Article: Boom–bust cycles: Leveraging, complex securities, and asset prices (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:deg:conpap:c016_034

Access Statistics for this paper

More papers in DEGIT Conference Papers from DEGIT, Dynamics, Economic Growth, and International Trade Contact information at EDIRC.
Bibliographic data for series maintained by Jan Pedersen ().