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The Subprime Mortgage Crisis: Irrational Exuberance or Rational Error?
| Content Provider | Semantic Scholar |
|---|---|
| Author | Kojucharov, Nikola Martin, Clyde F. Martin, Robert F. K. Xu, Lili |
| Copyright Year | 2009 |
| Abstract | We present a model of the subprime market in which credit quality and loan performance are driven by a statistical process with idiosyncratic and aggregate shocks. Investors use portfolio performance to infer the weight of each shock. We show that low and stable default rates from 2002-2005 convinced investors that the aggregate shock weight was small. In late 2006, when default rates surged, the market collapsed abruptly as investors abandoned their low-weight beliefs. We examine various proposals to fix the mortgage market and find that policy intervention has limited effectiveness in our model. |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | https://www.frbsf.org/economic-research/files/Kojucharov-Martin-Martin-Xu.pdf |
| Language | English |
| Access Restriction | Open |
| Content Type | Text |
| Resource Type | Article |