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Joint Applied Economics and Policy & Environmental, Real Estate and Urban Economics Workshop - Andra Ghent

Fri, 09/22/2017 - 10:30am

Andra Ghent

University of Wisconsin, Madison

401 Warren Hall

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We study complexity in the market for securitized products, a market at the heart of the financial crisis of 2007-2009. Our measures of the complexity of these products rose substantially in the years preceding the financial crisis. We find that securities in more complex deals default more and have lower realized returns. The worse performance is economically meaningful: a one standard deviation increase in complexity represents an 18% increase in default on AAA securities. However, yields of more complex securities are not higher indicating that investors do not perceive them as riskier. Our results indicate that complexity obfuscates security quality.

Event Categories: Environmental, Real Estate and Urban Economics