The first essay explores the dynamic behaviors of mortgage-backed stock returns and their volatility spillovers within the framework of time-varying symmetric, asymmetric and multivariate GARCH-family models. The focus of the chapter is on the dynamics of volatility of the U.S. real estate investment trusts (REITs) and volatility spillovers within the REITs subdivisions as well as between the REITs and the Fannie Mae (FNM) and theFreddie Mac (FRE) mortgage-backed stocks. We analyze risk-return linkages using the GARCH-in-mean (GARCH-M) model. The presence of asymmetric effects of "bad" news and "good" news on conditional financial volatilities is evaluated using the Threshold ARCH (TARCH) model and the exponential GARCH (EGARCH) model. Volatility spillovers and comovements within REITs subdivisions; REITs with FNM and FRE and other selected financial assets are examined using the multivariate GARCH (MGARCH) model. The second essay investigates factors behind the existence of time-varying conditional volatilities of mortgage-backed securities (MBS). This is done by analyzing the impacts of economic volatilities on mortgage-backed financial markets' performance. The relationship between conditional volatilities of the MBS and conditional volatilities of the key economic fundamentals in the housing sector and the macroeconomy are explored. The sensitivity of mortgage-backed stocks to the underlying time-series changes in economic fundamentals, and the extent to which economic volatilities explain the variation in mortgage-backed stocks' volatilities are investigated. Particularly, we examined whether changes in the REITs, FNM and FRE volatilities are linked to and driven by time-varying volatilities of the housing sector economic activity and set of key macroeconomic variables. Thus, the chapter analyzes the impacts of conditional economic volatilities on the conditional volatilities of the REITs, FRE and FNM stocks. The GARCH (p, q) process is used to find conditional volatility dynamics for the economic variables in the study. Then we employ multivariate GARCH (p, q) model to investigate the spillovers and comovements among the conditional economic fundamentals' volatilities and the conditional volatilities of the MBS. The third essay explores the impacts of foreign sector of the economy on the mortgage-backed financial markets and the housing sector. There is large surge of foreign capital flows to the U.S, particularly since late 1990s. The net foreign holdings of U.S. financial assets have become very significant in the U.S. Treasury notes and bonds. Foreign investors also hold a growing share of securities of the U.S. agencies and government sponsored enterprises (GSEs). Similarly, foreign direct investment in the U.S. real estate as well as real estate equities in the form of REITs has grown sharply. To this end, a multivariate vector autoregression (VAR) model is the main tool of analysis. Based on the VAR model, generalized impulse response functions and generalized variance decompositions are employed to evaluate the responses of mortgage interest rates and Treasury yields to the changes in net foreign ownership of U.S. Treasuries and agency bonds.

Many analysts believe that problems in the United States housing market initiated the 2007-2009 global financial crisis. In this regard, the subprime mortgage crisis (SMC) shook the foundations of the financial industry by causing the failure of many iconic Wall Street investment banks and prominent depository institutions. This crisis stymied credit extension to households and businesses thus creating credit crunches and, ultimately, a global recession. This thesis specifically discusses the SMC and its components, causes, consequences and cures in relation to subprime mortgage origination, data as well as bank bailouts. In particular, the SMC has highlighted the fact that risk, credit ratings, profit and valuation as well as capital regulation are important banking considerations. With regard to risk, the thesis discusses credit (including counterparty), market (including interest rate, basis, prepayment, liquidity and price), tranching (including maturity mismatch and synthetic), operational (including house appraisal, valuation and compensation) and systemic (including maturity transformation) risks. The thesis introduces the IDIOM hypothesis that postulates that the SMC was largely caused by the intricacy and design of subprime agents, mortgage origination that led to information problems (loss, asymmetry and contagion), valuation opaqueness and ineffective risk mitigation. It also contains appropriate examples, discussions, timelines as well as appendices about the main results on the aforementioned topics. Numerous references point to the material not covered in the thesis, and indicate some avenues for further research. In the sequel, the banks that we study are subprime interbank lenders (SILs), subprime originators (SORs), subprime dealer banks (SDBs) and their special purpose vehicles (SPVs) such as Wall Street investment banks and their special structures as well as subprime investing banks (SIBs). Furthermore, the primary subprime agents that we consider are house appraisers (HAs), mortgage brokers (MBs), mortgagors (MRs), servicers (SRs), trustees, underwriters and credit enhancement providers (CEPs). Also, the insurers involved in the subprime market are originator mortgage insurers (OMIs) and monoline insurers (MLIs). The main components of the SMC are MRs, the housing market, SDBs/hedge funds/money market funds/SIBs, the economy as well as the government (G) and central banks. Here, G either plays a regulatory, bailout or policymaking role. Most of the aforementioned banks and agents are assumed to be risk neutral with SOR being the exception since it can be risk (and regret) averse on occasion. The three main aspects of the SMC - subprime mortgage origination, data and bailouts - that we cover in this thesis and the chapters in which they are found are outlined below. In Chapter 2, we discuss the dynamics of SORs' capital, information, ratings, risk and valuation under mortgage origination. In particular, we model subprime mortgages that are able to fully amortize, voluntarily prepay or default and construct a discrete-time model for SOR risk and profit incorporating costs of funds and mortgage insurance as well as loan losses. Furthermore, a constrained optimal valuation problem for SORs under mortgage origination is solved. In addition, we show how high loan-to-value ratios curtailed the refinancing of subprime mortgages, while low ratios imply favorable house equity for subprime MRs. Chapter 2 also explores the relationship between Basel capital regulation and the SMC. This involves studying bank credit and capital under Basel regulation. Further issues dealt with are the quantity and pricing of subprime mortgages as well as credit ratings under Basel capital regulation. A key problem is whether Basel capital regulation exacerbated the SMC. Very importantly, the thesis answers this question in the affirmative. Chapter 3 contains subprime data not presented in Chapters 2. We present other mortgage data that also have connections with the main subprime issues raised. In Chapter 4, a troubled SOR's recapitalization by G via subprime bank bailouts is discussed. Our research supports the view that if SOR is about to fail, it will have an incentive not to extend low risk mortgages but rather high risk mortgages thus shifting risk onto its creditors. Here, for instance, we analyze the efficiency of purchasing toxic structured mortgage products from troubled SORs as opposed to buying preferred and common equity. In this regard, we compare the cases where SORs' on-balance sheet mortgages are fully amortizing, voluntarily prepaying (refinancing and equity extraction) and involuntarily prepaying (defaulting). If bailing out SORs considered to be too big to fail involves buying assets at above fair market values, then these SORs are encouraged ex-ante to invest in high risk mortgages and toxic structured mortgage products. Contrary to the policy employed by G, purchasing common (preferred) equity is always the most (least) ex-anteand ex-post-efficient type of capital injection. Our research confirms that this is true irrespective of whether SOR volunteers for recapitalization or not. In order to understand the key results in Chapters 2 to 4, a working knowledge of discrete-time stochastic modeling and optimization is required. The work presented in this thesis is based on a book (see [103]), 2 peer-reviewed international journal articles (see [51] and [105]), 2 peer-reviewed chapters in books (see [104] and [110]) and 4 peer-reviewed conference proceedings paper (see [23], [106], [107] and [109]). / Thesis (Ph.D. (Applied Mathematics))--North-West University, Potchefstroom Campus, 2011.

Many analysts believe that problems in the United States housing market initiated the 2007-2009 global financial crisis. In this regard, the subprime mortgage crisis (SMC) shook the foundations of the financial industry by causing the failure of many iconic Wall Street investment banks and prominent depository institutions. This crisis stymied credit extension to households and businesses thus creating credit crunches and, ultimately, a global recession. This thesis specifically discusses the SMC and its components, causes, consequences and cures in relation to subprime mortgage origination, data as well as bank bailouts. In particular, the SMC has highlighted the fact that risk, credit ratings, profit and valuation as well as capital regulation are important banking considerations. With regard to risk, the thesis discusses credit (including counterparty), market (including interest rate, basis, prepayment, liquidity and price), tranching (including maturity mismatch and synthetic), operational (including house appraisal, valuation and compensation) and systemic (including maturity transformation) risks. The thesis introduces the IDIOM hypothesis that postulates that the SMC was largely caused by the intricacy and design of subprime agents, mortgage origination that led to information problems (loss, asymmetry and contagion), valuation opaqueness and ineffective risk mitigation. It also contains appropriate examples, discussions, timelines as well as appendices about the main results on the aforementioned topics. Numerous references point to the material not covered in the thesis, and indicate some avenues for further research. In the sequel, the banks that we study are subprime interbank lenders (SILs), subprime originators (SORs), subprime dealer banks (SDBs) and their special purpose vehicles (SPVs) such as Wall Street investment banks and their special structures as well as subprime investing banks (SIBs). Furthermore, the primary subprime agents that we consider are house appraisers (HAs), mortgage brokers (MBs), mortgagors (MRs), servicers (SRs), trustees, underwriters and credit enhancement providers (CEPs). Also, the insurers involved in the subprime market are originator mortgage insurers (OMIs) and monoline insurers (MLIs). The main components of the SMC are MRs, the housing market, SDBs/hedge funds/money market funds/SIBs, the economy as well as the government (G) and central banks. Here, G either plays a regulatory, bailout or policymaking role. Most of the aforementioned banks and agents are assumed to be risk neutral with SOR being the exception since it can be risk (and regret) averse on occasion. The three main aspects of the SMC - subprime mortgage origination, data and bailouts - that we cover in this thesis and the chapters in which they are found are outlined below. In Chapter 2, we discuss the dynamics of SORs' capital, information, ratings, risk and valuation under mortgage origination. In particular, we model subprime mortgages that are able to fully amortize, voluntarily prepay or default and construct a discrete-time model for SOR risk and profit incorporating costs of funds and mortgage insurance as well as loan losses. Furthermore, a constrained optimal valuation problem for SORs under mortgage origination is solved. In addition, we show how high loan-to-value ratios curtailed the refinancing of subprime mortgages, while low ratios imply favorable house equity for subprime MRs. Chapter 2 also explores the relationship between Basel capital regulation and the SMC. This involves studying bank credit and capital under Basel regulation. Further issues dealt with are the quantity and pricing of subprime mortgages as well as credit ratings under Basel capital regulation. A key problem is whether Basel capital regulation exacerbated the SMC. Very importantly, the thesis answers this question in the affirmative. Chapter 3 contains subprime data not presented in Chapters 2. We present other mortgage data that also have connections with the main subprime issues raised. In Chapter 4, a troubled SOR's recapitalization by G via subprime bank bailouts is discussed. Our research supports the view that if SOR is about to fail, it will have an incentive not to extend low risk mortgages but rather high risk mortgages thus shifting risk onto its creditors. Here, for instance, we analyze the efficiency of purchasing toxic structured mortgage products from troubled SORs as opposed to buying preferred and common equity. In this regard, we compare the cases where SORs' on-balance sheet mortgages are fully amortizing, voluntarily prepaying (refinancing and equity extraction) and involuntarily prepaying (defaulting). If bailing out SORs considered to be too big to fail involves buying assets at above fair market values, then these SORs are encouraged ex-ante to invest in high risk mortgages and toxic structured mortgage products. Contrary to the policy employed by G, purchasing common (preferred) equity is always the most (least) ex-anteand ex-post-efficient type of capital injection. Our research confirms that this is true irrespective of whether SOR volunteers for recapitalization or not. In order to understand the key results in Chapters 2 to 4, a working knowledge of discrete-time stochastic modeling and optimization is required. The work presented in this thesis is based on a book (see [103]), 2 peer-reviewed international journal articles (see [51] and [105]), 2 peer-reviewed chapters in books (see [104] and [110]) and 4 peer-reviewed conference proceedings paper (see [23], [106], [107] and [109]). / Thesis (Ph.D. (Applied Mathematics))--North-West University, Potchefstroom Campus, 2011.

Many analysts believe that problems in the U.S. housing market initiated the 2008–2010 global financial crisis. In this regard, the subprime mortgage crisis (SMC) shook the foundations of the financial industry by causing the failure of many iconic Wall Street investment banks and prominent depository institutions. This crisis stymied credit extension to households and businesses thus creating credit crunches and, ultimately, a global recession. This thesis specifically discusses the SMC and its components, causes, consequences and cures in relation to subprime mortgages, securitization, as well as data. In particular, the SMC has highlighted the fact that risk, credit ratings, profit and valuation as well as capital regulation are important banking considerations. With regard to risk, the thesis discusses credit (including counterparty), market (including interest rate, basis, prepayment, liquidity and price), tranching (including maturity mismatch and synthetic), operational (including house appraisal, valuation and compensation) and systemic (including maturity transformation) risks. The thesis introduces the IDIOM hypothesis that postulates that the SMC was largely caused by the intricacy and design of subprime agents, mortgage origination and securitization that led to information problems (loss, asymmetry and contagion), valuation opaqueness and ineffective risk mitigation. It also contains appropriate examples, discussions, timelines as well as appendices about the main results on the aforementioned topics. Numerous references point to the material not covered in the thesis, and indicate some avenues for further research. In the thesis, the primary subprime agents that we consider are house appraisers (HAs), mortgage brokers (MBs), mortgagors (MRs), servicers (SRs), SOR mortgage insurers (SOMIs), trustees, underwriters, credit rating agencies (CRAs), credit enhancement providers (CEPs) and monoline insurers (MLIs). Furthermore, the banks that we study are subprime interbank lenders (SILs), subprime originators (SORs), subprime dealer banks (SDBs) and their special purpose vehicles (SPVs) such as Wall Street investment banks and their special structures as well as subprime investing banks (SIBs). The main components of the SMC are MRs, the housing market, SDBs/hedge funds/money market funds/SIBs, the economy as well as the government (G) and central banks. Here, G either plays a regulatory or policymaking role. Most of the aforementioned agents and banks are assumed to be risk neutral with SOR being the exception since it can be risk (and regret) averse on occasion. The main aspects of the SMC - subprime mortgages, securitization, as well as data - that we cover in this thesis and the chapters in which they are found are outlined below. In Chapter 2, we discuss the dynamics of subprime SORs' risk and profit as well as their valuation under mortgage origination. In particular, we model subprime mortgages that are able to fully amortize, voluntarily prepay or default and construct a discrete–time model for SOR risk and profit incorporating costs of funds and mortgage insurance as well as mortgage losses. In addition, we show how high loan–to–value ratios due to declining housing prices curtailed the refinancing of subprime mortgages, while low ratios imply favorable house equity for subprime MRs. Chapter 3 investigates the securitization of subprime mortgages into structured mortgage products such as subprime residential mortgage–backed securities (RMBSs) and collateralized debt obligations (CDOs). In this regard, our discussions focus on information, risk and valuation as well as the role of capital under RMBSs and RMBS CDOs. Our research supports the view that incentives to monitor mortgages has been all but removed when changing from a traditional mortgage model to a subprime mortgage model. In the latter context, we provide formulas for IB's profit and valuation under RMBSs and RMBS CDOs. This is illustrated via several examples. Chapter 3 also explores the relationship between mortgage securitization and capital under Basel regulation and the SMC. This involves studying bank credit and capital under the Basel II paradigm where risk–weights vary. Further issues dealt with are the quantity and pricing of RMBSs, RMBS CDOs as well as capital under Basel regulation. Furthermore, we investigate subprime RMBSs and their rates with slack and holding constraints. Also, we examine the effect of SMC–induced credit rating shocks in future periods on subprime RMBSs and RMBS payout rates. A key problem is whether Basel capital regulation exacerbated the SMC. Very importantly, the thesis answers this question in the affirmative. Chapter 4 explores issues related to subprime data. In particular, we present mortgage and securitization level data and forge connections with the results presented in Chapters 2 and 3. The work presented in this thesis is based on 2 peer–reviewed chapters in books (see [99] and [104]), 2 peer–reviewed international journal articles (see [48] and [101]), and 2 peer–reviewed conference proceeding papers (see [102] and [103]). / Thesis (Ph.D. (Applied Mathematics))--North-West University, Potchefstroom Campus, 2011.

Many analysts believe that problems in the U.S. housing market initiated the 2008–2010 global financial crisis. In this regard, the subprime mortgage crisis (SMC) shook the foundations of the financial industry by causing the failure of many iconic Wall Street investment banks and prominent depository institutions. This crisis stymied credit extension to households and businesses thus creating credit crunches and, ultimately, a global recession. This thesis specifically discusses the SMC and its components, causes, consequences and cures in relation to subprime mortgages, securitization, as well as data. In particular, the SMC has highlighted the fact that risk, credit ratings, profit and valuation as well as capital regulation are important banking considerations. With regard to risk, the thesis discusses credit (including counterparty), market (including interest rate, basis, prepayment, liquidity and price), tranching (including maturity mismatch and synthetic), operational (including house appraisal, valuation and compensation) and systemic (including maturity transformation) risks. The thesis introduces the IDIOM hypothesis that postulates that the SMC was largely caused by the intricacy and design of subprime agents, mortgage origination and securitization that led to information problems (loss, asymmetry and contagion), valuation opaqueness and ineffective risk mitigation. It also contains appropriate examples, discussions, timelines as well as appendices about the main results on the aforementioned topics. Numerous references point to the material not covered in the thesis, and indicate some avenues for further research. In the thesis, the primary subprime agents that we consider are house appraisers (HAs), mortgage brokers (MBs), mortgagors (MRs), servicers (SRs), SOR mortgage insurers (SOMIs), trustees, underwriters, credit rating agencies (CRAs), credit enhancement providers (CEPs) and monoline insurers (MLIs). Furthermore, the banks that we study are subprime interbank lenders (SILs), subprime originators (SORs), subprime dealer banks (SDBs) and their special purpose vehicles (SPVs) such as Wall Street investment banks and their special structures as well as subprime investing banks (SIBs). The main components of the SMC are MRs, the housing market, SDBs/hedge funds/money market funds/SIBs, the economy as well as the government (G) and central banks. Here, G either plays a regulatory or policymaking role. Most of the aforementioned agents and banks are assumed to be risk neutral with SOR being the exception since it can be risk (and regret) averse on occasion. The main aspects of the SMC - subprime mortgages, securitization, as well as data - that we cover in this thesis and the chapters in which they are found are outlined below. In Chapter 2, we discuss the dynamics of subprime SORs' risk and profit as well as their valuation under mortgage origination. In particular, we model subprime mortgages that are able to fully amortize, voluntarily prepay or default and construct a discrete–time model for SOR risk and profit incorporating costs of funds and mortgage insurance as well as mortgage losses. In addition, we show how high loan–to–value ratios due to declining housing prices curtailed the refinancing of subprime mortgages, while low ratios imply favorable house equity for subprime MRs. Chapter 3 investigates the securitization of subprime mortgages into structured mortgage products such as subprime residential mortgage–backed securities (RMBSs) and collateralized debt obligations (CDOs). In this regard, our discussions focus on information, risk and valuation as well as the role of capital under RMBSs and RMBS CDOs. Our research supports the view that incentives to monitor mortgages has been all but removed when changing from a traditional mortgage model to a subprime mortgage model. In the latter context, we provide formulas for IB's profit and valuation under RMBSs and RMBS CDOs. This is illustrated via several examples. Chapter 3 also explores the relationship between mortgage securitization and capital under Basel regulation and the SMC. This involves studying bank credit and capital under the Basel II paradigm where risk–weights vary. Further issues dealt with are the quantity and pricing of RMBSs, RMBS CDOs as well as capital under Basel regulation. Furthermore, we investigate subprime RMBSs and their rates with slack and holding constraints. Also, we examine the effect of SMC–induced credit rating shocks in future periods on subprime RMBSs and RMBS payout rates. A key problem is whether Basel capital regulation exacerbated the SMC. Very importantly, the thesis answers this question in the affirmative. Chapter 4 explores issues related to subprime data. In particular, we present mortgage and securitization level data and forge connections with the results presented in Chapters 2 and 3. The work presented in this thesis is based on 2 peer–reviewed chapters in books (see [99] and [104]), 2 peer–reviewed international journal articles (see [48] and [101]), and 2 peer–reviewed conference proceeding papers (see [102] and [103]). / Thesis (Ph.D. (Applied Mathematics))--North-West University, Potchefstroom Campus, 2011.