Securitization as a response to monetary policy

Jiarui Zhang (First Author), Xiaonian Xu (Participant Author)

    Research output: Contribution to journalJournal

    1 Citation (Web of Science)

    Abstract

    This paper studies how monetary easing provides incentives for banks to take risk and issue mortgage-backed securities (MBS) and, because MBS have the "lemon" property, why MBS buyers are willing to purchase high-risk securities at high prices. Banks need equity to attract deposits. Monetary easing reduces this need, and banks leverage up and reduce their monitoring efforts. The internal need for liquidity and risk sharing motivates banks to issue MBS. Security buyers understand the moral hazard problem that banks face but are willing to purchase bank securities at high prices because monetary easing would also reduce their cost of funds.
    Original languageEnglish
    Pages (from-to)1333-1344
    JournalInternational Journal of Finance Economics
    Volume241
    Issue number3
    DOIs
    Publication statusPublished - 2019

    Corresponding author email

    jiarui.zhang@nottingham.edu.cn

    Project name

    China Europe International Business School Faculty Research Grant

    Project sponsor

    其他

    Project No.

    n/a

    Keywords

    • monetary policy
    • mortgage-backed securities
    • risk taking

    Indexed by

    • ABDC-B
    • Scopus
    • SSCI

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