Based on the recent subprime crisis, the authors analyze the mechanisms of a financial market crisis. In order to highlight the basic transmission mechanisms and drivers of a financial market crisis they discuss the relevant players & strategies, explain the principles of the financial instruments that were involved in the crisis and analyze how bubbles emerge, how they burst and what the economic impact might be. The authors address the following key questions: – Why do financial markets run into crises over and over again? – Where do risks for financial crises come from? – Who are the players in the game? – Which instruments and strategies can drive a crisis? – What are the transmission mechanisms onto other markets and the real economy? – When is it all finally over? – How to best weather the storm? The subprime crisis contains all important ingredients for a financial market crisis: 1) a preceding bubble involving the usage of excessive leverage (not only in the subprime mortgage markets but also in the leveraged loan arena and in the structured credit universe), 2) inappropriate risk models and too optimistic assumptions for the underlying economic conditions 3) a deterioration in the underlying economic factors (delinquency rates), 4) a spread blowout and a stock market correction followed by the collapse of banks and hedge funds that implemented a too aggressive strategy, and 5) regulators and policy makers that step in to bail out distressed investors and to mitigate spillover effects onto the real economy. Hence, in the prologue the authors highlight the basic framework for a financial crisis based on the subprime crisis. Here, they will also introduce the important topics and drivers of the crisis, i.e. the relevant players (banks, investment banks, hedge funds, real money investors, regulators and rating agencies), the involved instruments (ABS/RMBS, CDOs, SIV, leveraged loans, Leveraged Super Senior tranches, etc.), the strategies which caused the crisis or were affected by the meltdown (leveraged exposure to highly correlated risks), and risks that were underestimated (investors ignored the market risk that was involved with the leveraged bets). In the subsequent chapter — which is split into three parts — they will explain these important topics in more detail and highlight the infection and transmission mechanisms. As an example, they introduce the business and investment concepts of investment banks and hedge funds and how they were involved in the crisis. Moreover, they explain how structured credit products (such as ABS, CDOs and SIVs) work and how they were used in order to implement leveraged bets in the markets. Finally, they highlight how a financial crisis evolves and why certain financial institutions failed. In the epilogue, they conclude how markets manage a crisis and why the crisis may also be healthy for the stability of financial markets.
Book Details:
- Author: Jochen Felsenheimer
- ISBN: 9783527503759
- Year Published: 2008
- Pages: 277
- BISAC: BUS001040, BUSINESS & ECONOMICS/Accounting / Managerial
About the Book and Topic:
Based on the recent subprime crisis, the authors analyze the mechanisms of a financial market crisis. In order to highlight the basic transmission mechanisms and drivers of a financial market crisis they discuss the relevant players & strategies, explain the principles of the financial instruments that were involved in the crisis and analyze how bubbles emerge, how they burst and what the economic impact might be. The authors address the following key questions: – Why do financial markets run into crises over and over again? – Where do risks for financial crises come from? – Who are the players in the game? – Which instruments and strategies can drive a crisis? – What are the transmission mechanisms onto other markets and the real economy? – When is it all finally over? – How to best weather the storm? The subprime crisis contains all important ingredients for a financial market crisis: 1) a preceding bubble involving the usage of excessive leverage (not only in the subprime mortgage markets but also in the leveraged loan arena and in the structured credit universe), 2) inappropriate risk models and too optimistic assumptions for the underlying economic conditions 3) a deterioration in the underlying economic factors (delinquency rates), 4) a spread blowout and a stock market correction followed by the collapse of banks and hedge funds that implemented a too aggressive strategy, and 5) regulators and policy makers that step in to bail out distressed investors and to mitigate spillover effects onto the real economy. Hence, in the prologue the authors highlight the basic framework for a financial crisis based on the subprime crisis. Here, they will also introduce the important topics and drivers of the crisis, i.e. the relevant players (banks, investment banks, hedge funds, real money investors, regulators and rating agencies), the involved instruments (ABS/RMBS, CDOs, SIV, leveraged loans, Leveraged Super Senior tranches, etc.), the strategies which caused the crisis or were affected by the meltdown (leveraged exposure to highly correlated risks), and risks that were underestimated (investors ignored the market risk that was involved with the leveraged bets). In the subsequent chapter — which is split into three parts — they will explain these important topics in more detail and highlight the infection and transmission mechanisms. As an example, they introduce the business and investment concepts of investment banks and hedge funds and how they were involved in the crisis. Moreover, they explain how structured credit products (such as ABS, CDOs and SIVs) work and how they were used in order to implement leveraged bets in the markets. Finally, they highlight how a financial crisis evolves and why certain financial institutions failed. In the epilogue, they conclude how markets manage a crisis and why the crisis may also be healthy for the stability of financial markets.
The subprime crisis contains all important ingredients for a financial market crisis: 1) a preceding bubble involving the usage of excessive leverage (not only in the subprime mortgage markets but also in the leveraged loan arena and in the structured credit universe), 2) inappropriate risk models and too optimistic assumptions for the underlying economic conditions 3) a deterioration in the underlying economic factors (delinquency rates), 4) a spread blowout and a stock market correction followed by the collapse of banks and hedge funds that implemented a too aggressive strategy, and 5) regulators and policy makers that step in to bail out distressed investors and to mitigate spillover effects onto the real economy.
– Due to the recent financial markets turmoil (subprime crisis) investors’ demand for suitable instruments and efficient management techniques is clearly rising. – Both authors are well known in the industry, continuously providing updates on new products and on general market developments. They are frequent speakers at conferences both in Europe and Asia.
About the Author
Dr. Jochen Felsenheimer works in the Global Research department at Unicredit. He heads the Credit Strategy & Structured Credit Team. He holds a PhD degree in Economics from Ludwig-Maximilians-Universitat Munchen. Dr. Philip Gisdakis works as a Senior Quantitative Credit Strategist at Unicredit. He studied Mathematical Finance at the University of Oxford and holds a PhD degree in Theoretical Chemistry from Technische Universitat Munchen.