Economic Stimulus Packages: How to Explain Differences in the Level of Intensity in European Governments’ Response to the Financial Crisis?
Since the end of World War II, capitalism and liberalism have been viewed as the system of the rich and have led the world into a period of unprecedented economic growth and development. The recent financial and economic crisis, however, by its magnitude, has shaken the system significantly, and led many states to invest increasingly to sustain the economy and avoid a broader and more damaging collapse (in line with Keynesian theory). Through multilevel modelling of European state-level political, public finance and economic data, we investigated key drivers explaining differences in the level of intensity in European governments’ response to the financial crisis. First of all, politics can explain the volatile and mercantile side of the decisions. Secondly, also interesting is that monetary and public finance highlights the regulatory and financial pressure and constraints of the investment in the economic stimulus package. Thirdly, a macro-economic analysis can help us assess the link between the damage (economic crisis) and the remedies (stimulus packages). This thematic approach allowed us to assess key factors that influenced the governments in their decision making and explain the heterogeneity in the magnitude of response between countries.
How Resilient are Mortgage Backed Securities to Collateralized Debt Obligation Market Disruptions?
The mortgage-backed securities (MBS) market has experienced significant changes over the past couple of years. Non-agency ("private label") securities, which are not guaranteed by the government or the government sponsored enterprises, now account for the majority of MBS issued. In this report, we review the rise of collateralized debt obligations (CDOs), the relaxation of lending standards, and the implementation of loan mitigation practices. We analyze whether these structural changes have created an environment of understated risk to investors of MBS. We also measure the efficacy of ratings agencies when it comes to assessing market risk rather than credit risk. Our findings imply that even investment grade rated CDOs will experience significant losses if home prices depreciate. We conclude by providing several policy implications of our findings.
Risk Aversion and Risk Premia in the CDS Market
Credit default swap (CDS) spreads compensate investors for expected loss, but they also contain risk premia because of investors' aversion to default risk. We estimate CDS risk premia and default risk aversion to have been highly volatile during 2002– 2005. Both measures appear to be related to fundamental macroeconomic factors, such as the stance of monetary policy, and technical market factors, such as issuance of collateralised debt obligations.