Since the end of the day quickly approaches, we happily present to you some dense academic work that points out a few new nuances on something you probably already intuitively knew about securitization. Alea picks up on an interesting paper that will take you there:
…as a result, statistical default model fitted in a low securitization period breaks down in the high securitization period in a systematic manner: it underpredicts defaults for borrowers for whom soft information is more valuable (i.e., borrowers with low documentation, low FICO scores and high loan-to-value ratios). We rationalize these findings in a theoretical model that highlights a reduction in lenders’ incentives to collect soft information as securitization becomes common, resulting in worse loans being issued to borrowers with similar hard information characteristics
The Failure of Models that Predict Failure: Distance, Incentives and Defaults [Alea]
The thing about statistics is it only uses past data. Once something’s already happened, of course they can build a model to predict it. It’s when crazy shit happens where there’s no precedent that the models fail.
-LiboRob
I proffer an update:
Lies, Damned Lies and Mortgages.
This sounds less like what any actual scientist would consider a “model” and more like a “post-hoc just so story”.
Little late with that paper, guys. To the dude building the model that proves that getting Congress involved in knee-jerk legislation will cause all of us to end up poor: hurry up or we’re screwed.
That study is for subprime loans only.
You mean to say that predatory lending is bad business? How come? Home prices always go up, and up, and up. Everybody gets their fat fees, and the one who gets stuck with the asset can foreclose, and then sell at a higher price, rinse and repeat, higher, and rinse and repeat higher…
What? Prices don’t always go up?
Never mind.
is it me, or did someone write a book about black swans?
It’s amazing how academics manage to prove history after the fact.
Also, the events of ’08-’10 are not “Black Swan” events. The irrationality of ’05-’07 in various asset classes may be defined as such. Generally, when things are overpriced, there’s a sharp revaluation. I’d say chicken, or KFC, if you’re American.
After all, EMH fanboys can’t complain. The markets are always right, hence the current price levels are the proper ones.
Popper, “Poverty of Historicism”
Too quanty; didn’t understand.
Run away quickly from any finance person who uses the term “theoretical model”.
@6, yes, a very poorly written book. An unreadable stack of pages, bound together and sold as prose, wrapped in a bow of smugness. But the key to everything is dumb luck and timing, so now that Maronite tyro is famous.
I love reading the hedge fund letters we’ve seen over the past year or two, which generally come in two varieties:
1. We’ve seen unprecedented and unforeseen volatility and downward pressure at rates (dx, d^2x) not witnessed since the great depression…
2. It was entirely obvious this house of cards was going to collapse, we’re not sure how everyone else is so dumb to take the other side of what we thought were obvious trades, oh, and we got kinda lucky and timed it right.
I’m somehow still, despite my penchant for cynicism, that two people with virtually the same academic background, same work experience, etc can look at (or not look at, more likely) the same data and make 2 polar opposite conclusions.
That last sentence?
Different personalities. Bet you could place any manager you meet into either bucket after a five minute conversation.
There’s also the Schiff category.
95% of statistics are made up on the spot anyway.
@11
His luck, captured in his own title. Wonder how his long-vol fund’s holding up.
too dense – can’t comprehend
My favorite Hedge Fund Papers say “this should happen about once every 6 Big Bangs” and then it happens every 5 years.
US Senator here, what is securitization?
I believe 18 has just spawned a new (although somewhat plagarized) line of DB comments. The possibilities are endless.
Wait, the dems stopped the reward trip in Vegas and yet they are going down to some spa for a retreat on the taxpayers’ dime? Wow, they have some set.
#6 indeed- Talib is a egotistical joke-he claims to have massive returns when no one else is watching- Bernie madoff are u listening??
@11 I had to sit through seven different group presentations on that same damn book. Just to distance myself, he’s Orthodox, not a (Catholic) Maronite like my msgr.
CGas says meet him in the Equinox locker room at 11pm if you want to get scooped first.
I just got a happy ending from CGas at Spellbound Massage…he was scooping the death of capitalism as we know it.
“Beware of geeks baring formulas”
-Warren Buffet
“Beware of geeks bearing formulas”
-Warren Buffet
Too Alea, didnt EP
Also
Bank CTO here, what is outsourcing ?