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 certification constraint. However, the model identifies 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.
Keywords: Local thinking; credit enhancement; financial guaranty; tail risk; capital coverage
자료실
자료실
[2014년 제 3차] Neglected risk and the market for bond insurance
작성자 : 관리자
조회수 : 1056
게시일 :
2014-08-22