Financial Crisis and Credit Crunch in the Housing Market

Posted: 11 Jul 2014

See all articles by F. Albert Wang

F. Albert Wang

University of Dayton - School of Business Administration - Department of Economics and Finance

Ting Zhang

University of Dayton - School of Business Administration

Date Written: July 9, 2014

Abstract

We investigate the recent financial crisis with an emphasis on the interlock among housing, mortgage, and credit markets. Following Geanakoplos (2003, 2010), we develop a model in which both prices of the mortgage and its collateral are simultaneously and endogenously determined. Our empirical tests confirm the model's prediction that an adverse change in the risk free rate or the loan recovery rate can trigger the financial crisis as we observed. Finally, we discuss how the pro-cyclical leveraging practice by financial intermediaries can magnify their losses in mortage-related assets and consequently cause significant contraction in the balance sheets of these firms.

Keywords: Financial crisis; Credit crunch; Housing market; Mortgage; Leverage; Collateral

Suggested Citation

Wang, Fukuo Albert and Zhang, Ting, Financial Crisis and Credit Crunch in the Housing Market (July 9, 2014). Journal of Real Estate Finance and Economics, Vol. 49, No. 2, 2014 (Forthcoming), Available at SSRN: https://ssrn.com/abstract=2464191

Fukuo Albert Wang (Contact Author)

University of Dayton - School of Business Administration - Department of Economics and Finance ( email )

300 College Park
Dayton, OH 45469
United States
937-229-3095 (Phone)

Ting Zhang

University of Dayton - School of Business Administration ( email )

300 College Park
Dayton, OH 45469
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
561
PlumX Metrics