Optimal mortgage loan securitization and the subprime crisis
2010
Mukuddem-Petersen, J. | Petersen, Mark Adam | Schoeman, I.M. | Mulaudzi, M.P. | 10921583 - Schoeman, Ilse Maria | 12359017 - Mukuddem-Petersen, Janine | 12307785 - Petersen, Mark Adam | 20999488 - Mulaudzi, Mmboniseni Phanuel
We analyze the process of mortgage loan securitization that has been a root cause of the current subprime mortgage crisis (SMC). In particular, we solve an optimal securitization problem for banks that has the cash outflow rate for financing a portfolio of mortgage-backed securities (MBSs) and the bank’s investment in MBSs as controls. In our case, the associated Hamilton–Jacobi–Bellman equation (HJBE) has a smooth solution when the optimal controls are computed via a power utility function. Finally, we analyze this optimization problem and its connections with the SMC
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