TY - JOUR A2 - Piccardi, Carlo AU - Petersen, M. A. AU - Mukuddem-Petersen, J. AU - Mulaudzi, M. P. AU - de Waal, B. AU - Schoeman, I. M. PY - 2010 DA - 2011/01/18 TI - Subprime Risk and Insurance with Regret SP - 950413 VL - 2010 AB - This paper investigates some of the risk and insurance issues related to the subprime mortgage crisis. The discussion takes place in a discrete-time framework with a subprime investing bankbeing considered to be regret and risk averse before and during the mortgage crisis, respectively. In particular, we investigate the bank's investment choices related to risky subprime structuredmortgage products and riskless treasuries. We conclude that if the bank takes regret into account,it will be exposed to higher risk when the difference between the expected returns on subprimestructured mortgage products and treasuries is small. However, there is low-risk exposure when thisdifference is high. Furthermore, we assess how regret can influence the bank's view of a rate of returnguarantee from monoline insurers. We find that before the crisis, regret decreased the investmentbank's preparedness to forfeit on returns when its structured product portfolio was considered tobe safe. Alternatively, risk- and regret-averse banks forfeit the same returns when their structuredmortgage product portfolio is considered to be risky. We illustrate the aforementioned findingsabout structured mortgage products and monoline insurance via appropriate examples. SN - 1026-0226 UR - https://doi.org/10.1155/2010/950413 DO - 10.1155/2010/950413 JF - Discrete Dynamics in Nature and Society PB - Hindawi Publishing Corporation KW - ER -