 Subprime Risk and Insurance with RegretM. A. Petersen, J. Mukuddem-Petersen, M. P. Mulaudzi, B. de Waal and I. M. Schoeman Discrete Dynamics in Nature and Society, 2010, vol. 2010, 1-52 Abstract: This paper investigates some of the risk and insurance issues related to the subprime mortgage crisis. The discussion takes place in a discrete-time framework with a subprime investing bank being considered to be regret and risk averse before and during the mortgage crisis, respectively. In particular, we investigate the bank's investment choices related to risky subprime structured mortgage products and riskless treasuries. We conclude that if the bank takes regret into account, it will be exposed to higher risk when the difference between the expected returns on subprime structured mortgage products and treasuries is small. However, there is low-risk exposure when this difference is high. Furthermore, we assess how regret can influence the bank's view of a rate of return guarantee from monoline insurers. We find that before the crisis, regret decreased the investment bank's preparedness to forfeit on returns when its structured product portfolio was considered to be safe. Alternatively, risk- and regret-averse banks forfeit the same returns when their structured mortgage product portfolio is considered to be risky. We illustrate the aforementioned findings about structured mortgage products and monoline insurance via appropriate examples. Date: 2010 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:hin:jnddns:950413 DOI: 10.1155/2010/950413 Access Statistics for this article More articles in Discrete Dynamics in Nature and Society from Hindawi |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.