Friday, June 24 – noon
Research Hall, Room 382

An Agent-Based Model of the Interaction between the Housing and RMBS Markets

Jonathan Goldstein
CSS PhD Student
George Mason University

Although many elements of the recent financial crisis are understood (e.g., the bursting of the housing bubble, a liquidity shortfall, a run on certain types of securities), the precise causes of the crisis is a matter of considerable debate. In this paper, I present an agent-based model that can be used to study the effect of the creation of asset-backed securities on the housing market. In this model, households move, purchase loans, refinance, and possibly default. Meanwhile, banks package these loans as mortgage back securities, which they sell to asset traders. These traders attempt to optimize the return on a portfolio of mortgage backed securities and a riskless asset (e.g., a 10 year treasury note). This model can reproduce some of the stylized facts of the crisis, such as the creation of a housing bubble and its eventual bursting, the use of mortgage backed securities causing an increase in the number of loans issued—including “predatory” adjustable rate mortgages—and the prevalence of cash out refinancing causing home owners to be highly leveraged. This model provides a basis for untangling the events leading to the financial crisis in 2008.