A note on the subprime mortgage crisis: dynamic modelling of bank leverage profit under loan securitization

Mark Adam Petersen, Mmboniseni Phanuel Mulaudzi, Janine Mukuddem-Petersen and Ilse Schoeman

Applied Economics Letters, 2010, vol. 17, issue 15, 1469-1474

Abstract: In this brief research article, we consider the financial modelling of the process of mortgage loan securitization that has been a root cause of the ongoing Subprime Mortgage Crisis (SMC). In particular, we suggest a Levy process-driven model of bank leverage profit that arises from the securitization of a pool of subprime mortgage loans. To achieve this, we develop stochastic models for mortgage loans, mortgage loan losses, credit ratings and mortgage loan guarantees in a subprime context. These models incorporate some of the most important issues related to the SMC and its causes. Finally, we provide a brief analysis of the models developed earlier in our contribution and its relationship with the SMC.

Date: 2010
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DOI: 10.1080/13504850903035907

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