ECON 251: Financial Theory
Lecture 25 - The Leverage Cycle and the Subprime Mortgage Crisis. Standard financial theory left us woefully unprepared for the financial crisis of 2007-09. Something is missing in the theory.
In the majority of loans the borrower must agree on an interest rate and also on how much collateral he will put up to guarantee repayment. The standard theory presented in all the textbooks ignores collateral.
The next two lectures introduce a theory of the Leverage Cycle, in which default and collateral are endogenously determined. The main implication of the theory is that when collateral requirements get looser
and leverage increases, asset prices rise, but then when collateral requirements get tougher and leverage decreases, asset prices fall. This stands in stark contrast to the fundamental value theory of asset pricing
we taught so far. We'll look at a number of facts about the subprime mortgage crisis, and see whether the new theory offers convincing explanations.
(from oyc.yale.edu)
| Lecture 25 - The Leverage Cycle and the Subprime Mortgage Crisis |
| Time | Lecture Chapters |
| [00:00:00] | 1. Assumptions on Loans in the Subprime Mortgage Market |
| [00:18:27] | 2. Market Weaknesses Revealed in the 2007-2009 Financial Crisis |
| [00:29:00] | 3. Collateral and Introduction to the Leverage Cycle |
| [00:38:53] | 4. Contrasts between the Leverage Cycle and CAPM |
| [00:43:36] | 5. Leverage Cycle Theory in Recent Financial History |
| [01:03:55] | 6. Negative Implications of the Leverage Cycle |
| [01:14:14] | 7. Conclusion |
| References |
| Lecture 25 - The Leverage Cycle and the Subprime Mortgage Crisis Instructor: Professor John Geanakoplos. Transcript [html]. Audio [mp3]. Download Video [mov]. |
Go to the Course Home or watch other lectures: