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This paper develops a theory of the secondary market trading of financial securitities in which endogenous asset market dynamics generate periods of growing aggregate credit volumes and falling credit standards even in the absence of "financial shocks." Falling credit standards in turn lead to...
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This paper develops a theory of the credit cycle to account for recent evidence that capital is increasingly allocated to inefficiently risky projects over the course of the boom. The model features lenders who sell risk exposure to non-lender investors in order to relax borrowing constraints,...
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that securitization improves financial stability if the securitized assets are held by capital market participants, rather …-backed securities (MBS) to evaluate this claim for subprime securitization during the Great Recession. I find that output in the U … subsequent deleveraging amplifies business cycles. My findings suggest that the existence of the securitization market stabilizes …
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Markets for securitized assets were characterized by high liquidity prior to the recent financial crisis and by a sudden market dry-up at the onset of the crisis. A general equilibrium model with heterogeneous investment opportunities and information frictions predicts that, in boom periods or...
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