Kamakura Announces New Research Measuring Contagion of Subprime Mortgage Defaults

Kamakura Releases New Jarrow Study of Government Policy Impacts.

Honolulu-based Kamakura Corporation announced today the release of an important policy-oriented research paper by Kamakura Managing Director for Research Robert A. Jarrow (pictured) with co-authors Marius Ascheberg (Goethe University), Holger Kraft (Goethe University), and Yildiray Yildirim (Syracuse University) (“AJKY”). The new paper uses a micro-economic model of the prime and subprime markets to measure the macro-economic impact of subprime mortgage defaults on home prices in general and prime mortgage defaults in particular. Jarrow et al then measure the impact of various government policy responses in order to assess the most effective means of dealing with the subprime-related credit crisis.

The AJKY paper is entitled “Government Policies, Residential Mortgage Defaults, and the Boom and Bust Cycle of Housing Prices.” The authors state “our key conclusions are that (i) there is a contagion effect from subprime defaults to prime defaults due to the negative impact of subprime defaults on aggregate income, and (ii) monetary policy is the most effective tool for decreasing mortgage defaults and increasing aggregate home prices in contrast to alternative government fiscal policies designed to loosen mortgage credit.”

“The AJKY paper uses modern non-arbitrage credit analytics from the transaction level to answer key questions about a huge credit portfolio, the mortgage market, in a very sophisticated way,” said Kamakura Chief Administrative Officer Martin Zorn, “Kamakura Risk Manager clients have been employing similar techniques on their respective portfolios throughout the credit crisis, always from a transaction level perspective. The AJKY paper puts into the public domain a credit adjusted simulation in a random interest rate framework, a true merging of credit risk analysis, interest rate risk analysis, and market risk analysis. Those market participants who were unable to use such an integrated framework across their full balance sheets tended to be those who suffered most in the credit crisis. We applaud Professor Jarrow and his co-authors for a theoretically elegant and immensely practical analysis of key policy issues for dealing with the aftermath of the housing crisis.”

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