The rise and fall of structured finance
The financial crisis of the year 2007 and 2008 saw the world affected negatively with the economy affected adversely (Smith & Mendoza, 2011). Several scores have been directed to increased demand in the housing sector while other have resulted in concluding it was the failure of the financial regulation authorities. The severe effect caused the United States economy job market loss approximately 8 million workers as the inflation rate declined to near zero. The main purpose of the paper is to give clear insights of what caused the increase in the structured finance market and eventually its fall.
In this study, the researcher set out to ...view middle of the document...
The capability of the structured finance to transfer risk and reduce it to the minimum level resulted in the increased issuance of structured securities that were deemed very risky by investors attracting them to invest as they appeared to be risk-free components certified by agencies that rated these securities. In the recent studies that have been presented through the subsequent studies in the past have confirmed the investments were riskier when compared to other assets and how they were advertised (Mallon & Waisman, 2011).
The study, therefore, aims to explain the rise and the falling of the structured market process and how securitization made it possible to for trillions of dollars to be transformed to securities from the risky assets. The effect of creating the notion of the assets being free from risk made them be considered widely safer (Köhn, 2011). The argument that is to be brought out in the study is to show the components of structured finance that had to fuel the growth of the finance sector and at the same time look at the features that led to its downfall.
In this study, the researcher set out to show that only securities that exhibited confidence when underlying them and how they attracted investors by making them appear as high paying. The study will also go an extra mile in explaining the correlation that is existing in the financial market components. Applying the structured prototype in security of finance, the researcher uses CDO (collateralized debt obligation) in illustrating that issuance of capital structure increases the likelihood occurrence of under evaluating of underlying securities and evaluation of risks
To understand the rise and the fall of the structured markets we commence by looking at how the financial market operates in the literature review. The construction of the collateralized obligations indebt are to express on how tranching and risk pooling gives opening to credits that lead to increased claims (Zhuolei, 2009). The rating agencies also go through challenges that we seek to explore and it this study, parameters that are useful in modelling and the assumptions that are made in arriving at the best rating to finance that is correct.
Several studies have been conducted on the structured market for over several years. These studies have provided deep insights into understanding the concept behind the operational mechanisms of the market. The common logic that stands out in these studies is the amplification of credit and collaterals in the security market. A study by Schaber (2009), set out to find the parameters that are significant in showing the variations in the structured finance and its associated risks. They realized the rating placed on the cause securities was AAA increasing the defaulting rate and its likelihood. The aspect of diversification of risks had to be factored in their studies as they sought to find out the available avenues the risks would have been...