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Uncertainty about the riskiness of new financial products was an important factor behind the U.S. credit crisis. We show that a boom-bust cycle in debt, asset prices and consumption characterizes the equilibrium dynamics of a model with a collateral constraint in which agents learn "by observation" the true riskiness of a new financial environment. Early realizations of states with high ability to leverage assets into debt turn agents optimistic about the persistence of a high-leverage regime. The model accounts for 69 percent of the household debt buildup and 53 percent of the rise in housing prices during 1997-2006, predicting a collapse in 2007.
Book Synopsis Financial Innovation, the Discovery of Risk, and the U.S. Credit Crisis by : Mr.Enrique G. Mendoza
Download or read book Financial Innovation, the Discovery of Risk, and the U.S. Credit Crisis written by Mr.Enrique G. Mendoza and published by International Monetary Fund. This book was released on 2010-07-01 with total page 64 pages. Available in PDF, EPUB and Kindle. Book excerpt: Uncertainty about the riskiness of new financial products was an important factor behind the U.S. credit crisis. We show that a boom-bust cycle in debt, asset prices and consumption characterizes the equilibrium dynamics of a model with a collateral constraint in which agents learn "by observation" the true riskiness of a new financial environment. Early realizations of states with high ability to leverage assets into debt turn agents optimistic about the persistence of a high-leverage regime. The model accounts for 69 percent of the household debt buildup and 53 percent of the rise in housing prices during 1997-2006, predicting a collapse in 2007.
Book Synopsis Financial Innovation, the Discovery of Risk, and the U.S. Credit Crisis by :
Download or read book Financial Innovation, the Discovery of Risk, and the U.S. Credit Crisis written by and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
With contributions from world-renowned figures such as Niall Ferguson and Adair Turner, this volume investigates how financial institutions and markets have undergone or reacted to past pressures, and the regulatory responses that emerged as a result.
Book Synopsis Financial Innovation, Regulation and Crises in History by : Harold James
Download or read book Financial Innovation, Regulation and Crises in History written by Harold James and published by Routledge. This book was released on 2015-10-06 with total page 280 pages. Available in PDF, EPUB and Kindle. Book excerpt: With contributions from world-renowned figures such as Niall Ferguson and Adair Turner, this volume investigates how financial institutions and markets have undergone or reacted to past pressures, and the regulatory responses that emerged as a result.
Prominent economists consider the role of financial innovation in economic crises.
Book Synopsis Financial Innovation by : Michael Haliassos
Download or read book Financial Innovation written by Michael Haliassos and published by MIT Press. This book was released on 2013 with total page 275 pages. Available in PDF, EPUB and Kindle. Book excerpt: Prominent economists consider the role of financial innovation in economic crises.
Sustainable, responsible financial innovation: lessons from the crisis, and new paths to global prosperity After the global financial crisis, responsible financial innovation is more crucial than ever. However, financial innovation will only succeed if it reflects the true lessons of the past decade. In this collection, three leading global finance researchers share those lessons, offering crucial insights for market participants, policymakers, and other stakeholders. Drawing on their pioneering work, they illuminate new opportunities for sustainable innovation in finance that can help restore housing markets and the overall global economy, while avoiding the failures of predecessors. In Financing the Future, Franklin Allen and Glenn Yago carefully discuss the current role of financial innovation in capitalizing businesses, industries, breakthrough technologies, housing solutions, medical treatments, and environmental projects. Allen and Yago explain how sophisticated capital structures can enable companies and individuals to raise funding in larger amounts for longer terms at lower cost, accomplishing tasks that would otherwise be impossible -- and offer a full chapter of essential lessons for using financial innovation to add value, manage risk, and improve the stability of the global economy. Next, in Fixing the Housing Market, Allen, Yago, and James R. Barth explain how responsible financial innovation can "reboot" damaged housing markets, improve their efficiency, and make housing more accessible to millions. The authors walk through the history of housing finance, evaluate housing finance systems in mature economies during and after the crisis, highlight benefits and risks associated with each leading mortgage funding structure and product, and assess current housing finance structures in BRIC economies. Building on these comparisons, they show how to create a more stable and sustainable financing system for housing: one that provides better shelter for more people, helps the industry recover, and creates thousands of new jobs. From world-renowned leaders and experts Franklin Allen, Glenn Yago, and James R. Barth
Book Synopsis Financial Innovation (Collection) by : Franklin Allen
Download or read book Financial Innovation (Collection) written by Franklin Allen and published by FT Press. This book was released on 2012-06-01 with total page 843 pages. Available in PDF, EPUB and Kindle. Book excerpt: Sustainable, responsible financial innovation: lessons from the crisis, and new paths to global prosperity After the global financial crisis, responsible financial innovation is more crucial than ever. However, financial innovation will only succeed if it reflects the true lessons of the past decade. In this collection, three leading global finance researchers share those lessons, offering crucial insights for market participants, policymakers, and other stakeholders. Drawing on their pioneering work, they illuminate new opportunities for sustainable innovation in finance that can help restore housing markets and the overall global economy, while avoiding the failures of predecessors. In Financing the Future, Franklin Allen and Glenn Yago carefully discuss the current role of financial innovation in capitalizing businesses, industries, breakthrough technologies, housing solutions, medical treatments, and environmental projects. Allen and Yago explain how sophisticated capital structures can enable companies and individuals to raise funding in larger amounts for longer terms at lower cost, accomplishing tasks that would otherwise be impossible -- and offer a full chapter of essential lessons for using financial innovation to add value, manage risk, and improve the stability of the global economy. Next, in Fixing the Housing Market, Allen, Yago, and James R. Barth explain how responsible financial innovation can "reboot" damaged housing markets, improve their efficiency, and make housing more accessible to millions. The authors walk through the history of housing finance, evaluate housing finance systems in mature economies during and after the crisis, highlight benefits and risks associated with each leading mortgage funding structure and product, and assess current housing finance structures in BRIC economies. Building on these comparisons, they show how to create a more stable and sustainable financing system for housing: one that provides better shelter for more people, helps the industry recover, and creates thousands of new jobs. From world-renowned leaders and experts Franklin Allen, Glenn Yago, and James R. Barth
Seven years after the financial crisis of 2008, financiers remain villains in the public mind. Most Americans believe that their irresponsible actions and complex financial products wrecked the economy and destroyed people's savings, and that bankers never adequately paid for their crimes. But as Economist journalist Andrew Palmer argues in Smart Money, this much maligned industry is not only capable of doing great good for society, but offers the most powerful means we have for solving some of our most intractable social problems. From Babylon to the present, the history of finance has always been one of powerful innovation. Now a new generation of financial entrepreneurs is working to revive this tradition of useful innovation, and Palmer shows why we need their ideas today more than ever. Traveling to the centers of finance across the world, Palmer introduces us to peer-to-peer lenders who are financing entrepreneurs the big banks won't bet on, creating opportunities where none existed. He explores the world of social-impact bonds, which fund programs for the impoverished and homeless, simultaneously easing the burden on national governments and producing better results. And he explores the idea of human-capital contracts, whereby investors fund the educations of cash-strapped young people in return for a percentage of their future earnings. In this far-ranging tour of the extraordinarily creative financial ideas of today and of the future, Smart Money offers an inspiring look at the new era of financial innovation that promises to benefit us all.
Book Synopsis Smart Money by : Andrew Palmer
Download or read book Smart Money written by Andrew Palmer and published by Basic Books. This book was released on 2015-04-14 with total page 304 pages. Available in PDF, EPUB and Kindle. Book excerpt: Seven years after the financial crisis of 2008, financiers remain villains in the public mind. Most Americans believe that their irresponsible actions and complex financial products wrecked the economy and destroyed people's savings, and that bankers never adequately paid for their crimes. But as Economist journalist Andrew Palmer argues in Smart Money, this much maligned industry is not only capable of doing great good for society, but offers the most powerful means we have for solving some of our most intractable social problems. From Babylon to the present, the history of finance has always been one of powerful innovation. Now a new generation of financial entrepreneurs is working to revive this tradition of useful innovation, and Palmer shows why we need their ideas today more than ever. Traveling to the centers of finance across the world, Palmer introduces us to peer-to-peer lenders who are financing entrepreneurs the big banks won't bet on, creating opportunities where none existed. He explores the world of social-impact bonds, which fund programs for the impoverished and homeless, simultaneously easing the burden on national governments and producing better results. And he explores the idea of human-capital contracts, whereby investors fund the educations of cash-strapped young people in return for a percentage of their future earnings. In this far-ranging tour of the extraordinarily creative financial ideas of today and of the future, Smart Money offers an inspiring look at the new era of financial innovation that promises to benefit us all.
Financial innovation can drive social, economic, and environmental change, transforming ideas into new technologies, industries, and jobs. But when it is misunderstood or mismanaged, the consequences can be severe. In this practical, accessible book, two leading experts explain how sophisticated capital structures can enable companies and individuals to raise funding in larger amounts for longer terms and at lower cost—accomplishing tasks that would otherwise be impossible. The authors recount the history and basic principles of financial innovation, showing how new instruments have evolved, and how they have been used and misused. They thoroughly demystify complex capital structures, offering a practical toolbox for entrepreneurs, corporate executives, and policymakers. Financing the Future presents clear, thorough discussions of the current role of financial innovation in capitalizing businesses, industries, breakthrough technologies, housing solutions, medical treatments, and environmental projects. It also presents a full chapter of lessons learned: essential insights for stabilizing the economy and avoiding pitfalls. Distinguishing genuine innovation from dangerous copycats Crafting sustainable financial innovations that add value and manage risk The best tools for the job: choosing them, customizing them, using them Selecting the right instruments and structures, and making the most of them Financial innovations for business, housing, and medical research Finding new and better ways to promote entrepreneurship and advance social goals Innovating to save the planet and help humanity The power of finance to protect natural resources and alleviate global poverty This is the first in a new series of books on financial innovation, published through a collaboration between Wharton School Publishing and the Milken Institute. Future titles will focus on specific policy areas such as housing and medical research. The Milken Institute is an independent economic think tank whose mission is to improve the lives and economic conditions of diverse populations in the United States and around the world by helping business and public policy leaders identify and implement innovative ideas for creating broad-based prosperity. It puts research to work with the goal of revitalizing regions and finding new ways to generate capital for people with original ideas.
Book Synopsis Financing the Future by : Franklin Allen
Download or read book Financing the Future written by Franklin Allen and published by Pearson Prentice Hall. This book was released on 2010-03-23 with total page 262 pages. Available in PDF, EPUB and Kindle. Book excerpt: Financial innovation can drive social, economic, and environmental change, transforming ideas into new technologies, industries, and jobs. But when it is misunderstood or mismanaged, the consequences can be severe. In this practical, accessible book, two leading experts explain how sophisticated capital structures can enable companies and individuals to raise funding in larger amounts for longer terms and at lower cost—accomplishing tasks that would otherwise be impossible. The authors recount the history and basic principles of financial innovation, showing how new instruments have evolved, and how they have been used and misused. They thoroughly demystify complex capital structures, offering a practical toolbox for entrepreneurs, corporate executives, and policymakers. Financing the Future presents clear, thorough discussions of the current role of financial innovation in capitalizing businesses, industries, breakthrough technologies, housing solutions, medical treatments, and environmental projects. It also presents a full chapter of lessons learned: essential insights for stabilizing the economy and avoiding pitfalls. Distinguishing genuine innovation from dangerous copycats Crafting sustainable financial innovations that add value and manage risk The best tools for the job: choosing them, customizing them, using them Selecting the right instruments and structures, and making the most of them Financial innovations for business, housing, and medical research Finding new and better ways to promote entrepreneurship and advance social goals Innovating to save the planet and help humanity The power of finance to protect natural resources and alleviate global poverty This is the first in a new series of books on financial innovation, published through a collaboration between Wharton School Publishing and the Milken Institute. Future titles will focus on specific policy areas such as housing and medical research. The Milken Institute is an independent economic think tank whose mission is to improve the lives and economic conditions of diverse populations in the United States and around the world by helping business and public policy leaders identify and implement innovative ideas for creating broad-based prosperity. It puts research to work with the goal of revitalizing regions and finding new ways to generate capital for people with original ideas.
Book Synopsis Financial Innovation, Regulation and Crises in History by : Piet Clement
Download or read book Financial Innovation, Regulation and Crises in History written by Piet Clement and published by . This book was released on 2014 with total page 176 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Prior studies have focused on innovations in various contexts but largely excluded financial innovations, despite their notable importance. Not surprisingly, financial innovations account for a substantial portion of world economies and the huge market capitalization of bank. Therefore, the authors focus on studying the type, success, and causes of success of financial innovations. Using an event study and financial expert ratings, this study analyzes the types of and payoffs to 428 financial innovations by 39 major banks in North America and Western Europe between 2001 and 2010. The results indicate that security and credit instruments constitute the most common financial innovations and insurance innovations are the least common, which vary substantially by economic cycles and location. The average cumulative abnormal stock market returns to a financial innovation are $146 million. They are twice as high in the United States as in Western Europe. Thus, the market considers financial innovations profitable, not harmful, despite their apparent responsibility for the financial crisis. Surprisingly, the cumulative abnormal stock market returns to financial innovations are higher in recessions than in expansions. The authors find that riskiness and radicalness of the innovation increases abnormal stock market returns while complexity decreases cumulative abnormal stock market returns. Two interaction effects stand out: Riskiness of financial innovations has higher cumulative abnormal stock market returns in the United States than in Western Europe. Radicalness has lower cumulative abnormal stock market returns in recessions than in expansions. The authors recommend that banks need to time their launch of radical financial innovations to coincide with periods of expansion rather than recessions.
Book Synopsis Stock Market Returns to Financial Innovations Before and During the Financial Crisis in US and Europe by : Lisa Schöler
Download or read book Stock Market Returns to Financial Innovations Before and During the Financial Crisis in US and Europe written by Lisa Schöler and published by . This book was released on 2013 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: Prior studies have focused on innovations in various contexts but largely excluded financial innovations, despite their notable importance. Not surprisingly, financial innovations account for a substantial portion of world economies and the huge market capitalization of bank. Therefore, the authors focus on studying the type, success, and causes of success of financial innovations. Using an event study and financial expert ratings, this study analyzes the types of and payoffs to 428 financial innovations by 39 major banks in North America and Western Europe between 2001 and 2010. The results indicate that security and credit instruments constitute the most common financial innovations and insurance innovations are the least common, which vary substantially by economic cycles and location. The average cumulative abnormal stock market returns to a financial innovation are $146 million. They are twice as high in the United States as in Western Europe. Thus, the market considers financial innovations profitable, not harmful, despite their apparent responsibility for the financial crisis. Surprisingly, the cumulative abnormal stock market returns to financial innovations are higher in recessions than in expansions. The authors find that riskiness and radicalness of the innovation increases abnormal stock market returns while complexity decreases cumulative abnormal stock market returns. Two interaction effects stand out: Riskiness of financial innovations has higher cumulative abnormal stock market returns in the United States than in Western Europe. Radicalness has lower cumulative abnormal stock market returns in recessions than in expansions. The authors recommend that banks need to time their launch of radical financial innovations to coincide with periods of expansion rather than recessions.
The 2008 financial crisis cost $15 trillion in the U.S. stock and residential housing markets. The crash hit institutions and citizens, threatening economic survival, employment, and retirement prospects. What went wrong? And how can we prevent a similar disaster? InWorth the Risk, Robert Merton - the Nobel Prize-winning economist whose work revolutionized financial markets - offers answers. Merton maintains that the magnitude of the crisis points to more fundamental forces at work than the greed, selfishness, or criminal behavior of some financial-system players and consumers. In clear, accessible language, he demystifies those forces. For example, he shows: Why the professionals underestimated the riskiness of mortgage-backed securities and corporate loan portfolios. How the financial innovations that brought home ownership to millions of Americans combined with other benign developments to inject huge, systemic risk into the U.S. economy. Merton then identifies specific reforms that could improve regulation and transparency in the financial-services industry and head off a similar crash in the future. In particular, he offers strategies for minimizing risks in the innovation of financial instruments - which remains essential for our economy's health. And he suggests innovations that could open the door to security and growth for nations, corporations, and individuals. Engaging and authoritative,Worth the Riskprovides answers to the burning questions on everyone's mind? and paints an encouraging picture of a far more solid financial future.
Book Synopsis Worth the Risk by : Robert C. Merton
Download or read book Worth the Risk written by Robert C. Merton and published by Harvard Business School Press. This book was released on 2010-10-01 with total page 130 pages. Available in PDF, EPUB and Kindle. Book excerpt: The 2008 financial crisis cost $15 trillion in the U.S. stock and residential housing markets. The crash hit institutions and citizens, threatening economic survival, employment, and retirement prospects. What went wrong? And how can we prevent a similar disaster? InWorth the Risk, Robert Merton - the Nobel Prize-winning economist whose work revolutionized financial markets - offers answers. Merton maintains that the magnitude of the crisis points to more fundamental forces at work than the greed, selfishness, or criminal behavior of some financial-system players and consumers. In clear, accessible language, he demystifies those forces. For example, he shows: Why the professionals underestimated the riskiness of mortgage-backed securities and corporate loan portfolios. How the financial innovations that brought home ownership to millions of Americans combined with other benign developments to inject huge, systemic risk into the U.S. economy. Merton then identifies specific reforms that could improve regulation and transparency in the financial-services industry and head off a similar crash in the future. In particular, he offers strategies for minimizing risks in the innovation of financial instruments - which remains essential for our economy's health. And he suggests innovations that could open the door to security and growth for nations, corporations, and individuals. Engaging and authoritative,Worth the Riskprovides answers to the burning questions on everyone's mind? and paints an encouraging picture of a far more solid financial future.
