Securitization of Mortgage Debt, Asset Prices and International Risk Sharing

Abstract

We explore the impact of mortgage securitization on the international diversi…cation of macroeconomic risk. By making mortgage-related risks internationally tradeable, securitization contributes considerably to better international consumption risk sharing: we …nd that countries with the most highly developed markets for securitized mortgage debt have consumption responses to a typical idiosyncratic business cycle shock that are 20-30 percent less volatile than those experienced by countries that do not allow for mortgage securitization. Our results are based on quarterly data from a panel of 16 industrialized countries and cover the sample period 1985-2008Q1. They are robust to a range of controls for other aspects of …nancial globalization, international di¤erences in the structure of housing markets and the …nancial system etc. Against the backdrop of the subprime crisis, these …ndings inevitably raise the question whether securitization could not just facilitate risk sharing in tranquil times but that it actually fails to provide international insurance in severe crisis periods. Indeed, we …nd that international risk sharing decreases in global asset price downturns and increases in booms. But we do not …nd evidence that countries with more developed securitization markets are systematically more exposed to these ‡uctuations in the extent to which risk can be shared across national boundaries.

Banks, Financial Markets and International Consumption Risk Sharing

“…In short, what matters for risk sharing is not financial development per se , but the development of financial markets suggesting that is primarily the tradability of risk which helps to share risk across countries. This result is in line with Hoffmann and Nitschka () who find that increased tradability of risk due to securitization has improved international risk sharing. Banks, in contrast, do not appear to be a substitute for the tradability of risk.…”

Capital Inflows, Financial Structure and Housing Booms

“…(a) Real private credit is adjusted for level shifts that occur because of redefinitions or reclassification. As in Goodhart and Hoffmann (), we replace the growth rate in the quarter where the shift occurs with the median growth of the two quarters before and after the shift. Level shifts occur for the following countries at the following dates: AUS Q3 1984, Q4 1984, Q4 1988; BEL Q4 1992; CAN Q1 1981, Q4 2001; CHE Q4 1974, Q3 1982; DEU Q2 1990, Q1 1999; DNK Q1 1991, Q3 2000; FRA Q1 1978; ITA Q1 1999, Q1 1991; IRE Q2 1970, Q1 1995, Q4 1982; JPN Q4 1997, Q4 2001; NLD Q4 1988; NZL Q3 1988.…”

“…A major development in mortgage finance in the past 25 years has been the increased availability of mortgage‐backed securities (MBSs) resulting from changes in legislation in a number of countries. Hoffmann and Nitschka () construct a qualitative de‐jure indicator of the degree of securitization in the mortgage sector. This securitization index equals one if countries have a fully liberalized MBS market and zero if securitization is not permitted by national law or regulation.…”

Banks, Financial Markets and International Consumption Risk Sharing

“…Thus, although the banking sector in the US contributes to risk sharing across states, banks do not appear to improve risk sharing across countries. The paper is also closely related to Hoffmann and Nitschka (2008). They show that the securitization of mortgage debt contributes significantly to risk sharing by making risk associated with residential real estate tradable.…”