Risk amplification effect of asset securitization among financial institutions: evidence from CDO products in the USA

Abstract

This article theoretically and empirically investigates the risk amplification effects of asset securitization among financial institutions in the USA based on a risk model and a single-factor time series model. Results show that systemic risk of financial institutions is enlarged by asset securitization, and the reaction is faster with a larger issuance and holdings of collateralized debt obligation.

Keywords:

• asset securitization
• systemic risk
• amplification effect
• CDO

JEL Classification:

• G20
• G15

Funding

We appreciate the financial support of the Fundamental Research Funds for the Central Universities of China [grant number DUT13RC (3) 42]; Postdoctoral Science Foundation of China [grant number 2013M541215]; Ministry of Education of Humanities and Social Science Fund of China [grant number 10YJA790002].

Notes

¹ Date is from Inside Mortgage Finance and Asset Backed Alert GS.