n?u=RePEc:bde:wpaper:1526&r=all

repec.nep.mac

n?u=RePEc:bde:wpaper:1526&r=all

1. Introduction

The volume of securitized assets traded in the US has grown remarkably from the

beginning of the 1990s until the onset of the global financial crisis, when it collapsed.

Figure 1 shows the monthly volume of issuance of asset-backed securities (ABS), mortgagebacked

securities (MBS) and their sum (all) from January 1993 until December 2010.

Such volumes have been determinant in shaping the development of financial markets and

particularly financial intermediation, motivating several studies to analyse their effects on

credit issuance and standards, focusing particularly on mortgage markets. The general

message is that mortgage securitization increases loan supply and lowers aggregate price

of credit. Although securitization has traditionally been higher in the mortgage market,

our data shows that the issuance of ABS matches the issuance of MBS in the beginning

of the 2000’s. Furthermore, the participants in the market for asset-backed securities are

financial entities, comprising financial companies and funding corporations, sometimes

referred to as shadow banks, who hold a more diverse portfolio than commercial banks.

As a result, due to potential portfolio effects, those high volumes of securitization might

affect other asset classes. The focus of this paper, therefore, is to investigate the effects of

securitization on bond and equity markets.

Figure 1: Volume of Securitization - US

200

150

100

50

0

Jan93 Jan94 Feb95 Feb96 Mar97 Apr98 Apr99 May00 Jun01 Jun02 Jul03 Aug04 Aug05 Sep06 Oct07 Oct08 Nov09 Dec10

abs mbs all (in billion USD)

We first conduct an empirical analysis that looks at the dynamic properties of bond and

equity excess returns (risk premia 1 ) and identify the effects of variations in the volume of

securitization on asset prices. The benchmark empirical specification builds upon the work

of Campbell, Chan, and Viceira (2003), and sets up a general vector autoregressive (VAR)

process for asset returns including the volume of securitization, the bond premium and the

equity premium. Additionally, as they do, we include the short-term rate, the dividend-

1 We will use excess returns and risk premia interchangeably. Note that in some studies risk premia is

defined as the expected excess return.

BANCO DE ESPAÑA 7 DOCUMENTO DE TRABAJO N.º 1526

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