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초록
영어
Monoline insurers collapsed in a dramatic manner during the subprime crisis. In this paper, I present a stylized model to account for this market breakdown. The initial neglect of a severe loss outcome by local thinking agents can trigger rating downgrade of insurers. This results in a damaging forced exit of investors with an investment certiffication constraint. However, the model identies a more fundamental problem. Even when the agents are rational, bond insurance exerts a negative externality by eliminating the price discount of an uninsured bond. Therefore, excessive focus on proper risk management alone may not improve the market welfare.
목차
Abstract
1. Introduction
2. The model
2.1. Asset composition and payo structure
2.2. Market participants
3. Rational benchmark
3.1. Insurance choice at issuance (t = 0)
3.2. Subsequent decisions at t = 1 and t = 2
3.3. Welfare implications
4. Local thinking and neglected risk
4.1. Insurance choice with local thinking (t = 0)
4.2. Prospect of insurer downgrade at t = 1
4.3. Welfare implications of neglected risk
5. Heterogeneity in the agents' risk perception
5.1. CRA and bond insurers with full rationality
5.2. Rational CRA with local thinking bond insurers
5.3. Local thinking CRA with rational bond insurers
6. Discussion
6.1. Main predictions of the model
6.2. Policy implications
6.3. Extensions
7. Conclusion
Appendix
References
Figure
1. Introduction
2. The model
2.1. Asset composition and payo structure
2.2. Market participants
3. Rational benchmark
3.1. Insurance choice at issuance (t = 0)
3.2. Subsequent decisions at t = 1 and t = 2
3.3. Welfare implications
4. Local thinking and neglected risk
4.1. Insurance choice with local thinking (t = 0)
4.2. Prospect of insurer downgrade at t = 1
4.3. Welfare implications of neglected risk
5. Heterogeneity in the agents' risk perception
5.1. CRA and bond insurers with full rationality
5.2. Rational CRA with local thinking bond insurers
5.3. Local thinking CRA with rational bond insurers
6. Discussion
6.1. Main predictions of the model
6.2. Policy implications
6.3. Extensions
7. Conclusion
Appendix
References
Figure
저자정보
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