Excerpt from Leveraged Losses: Lessons from the Mortgage Market Meltdown
By David Greenlaw, Jan Hatzius, Anil K Kashyap, Hyun Song Shin
There are many caveats that come with these estimates. We know that trading is thin in the underlying loan pools. More importantly, the ABX prices probably include a risk premium that is necessary to induce investors to bear mortgage credit risk in the current mortgage credit crisis. It may therefore overstate the market’s true expectation of future losses, although the size of this overstatement is difficult to gauge. Nonetheless, it is interesting to us that the range of losses from this exercise is not too different from the one obtained using method one calculations.
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