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exercise_topic_09

# exercise_topic_09 - θ and C ν H θ H 1 θ H for the...

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U NIVERSITY OF E SSEX D EPARTMENT OF E CONOMICS Session 2011–12 R. E. Bailey EC372 Economics of Bond and Derivatives Markets Exercise 9: Financial Intermediation, I 1. Identify the main motives for, and risks associated with, securitisation of assets for (a) the originating bank; and (b) holders of the securities. What are the implications, if any, for regulating the process of securitisation? 2. In the screening model (see lecture note ‘Financial Intermediation, I’), suppose that: ν H = 4 / 10; θ H = 3 / 4; X = 12 / 5; ν L = 6 / 10; θ L = 1 / 3; C = 1 / 4 (a) Show that, for these parameter values, there exists an ‘interior equilibrium’, with 0 < γ < 1 . Interpret the result. (b) For these parameter values, calculate the value of γ for the interior equilibrium. (c) For what range of C does an interior equilibrium exist (given the assumed values for the other parameters? (d) Suppose that C falls outside this range. What does the model predict? Interpret the results. H INT : begin by calculating
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Unformatted text preview: θ and C ν H θ H + 1 θ H for the assumed values. Most of the answers are fractions – simplify the results as much as possible but leave them as fractions. 3. In the screening model, obtain expressions for the expected net output per unit of investment in the following possible equilibria: (i) bonds-only; (ii) banks-only; (iii) interior (bonds-and-banks). Interpret this results. [‘Expected net output’ = expected output from an investment of X minus the investment, X .] 4. In the screening model, if an interior equilibrium exists, then so also does a banks-only equilib-rium: there is no prediction about which of the two will be observed. How could this weakness of the model be overcome? That is, what assumptions of the model should be replaced to ob-tain more plausible results? [NOTE: a detailed analysis of revised models is not required.] *****...
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