The Leverage Cycle and the Subprime Mortgage Crisis - Financial Theory

Explore the concept of the Leverage Cycle and its role in the Subprime Mortgage Crisis in this 77-minute lecture from Yale University's Financial Theory course. Delve into the limitations of standard financial theory in predicting the 2007-09 financial crisis and examine a new theory that incorporates collateral and default into loan agreements. Analyze how changes in collateral requirements and leverage affect asset prices, contrasting this with traditional fundamental value theory. Investigate key aspects of the subprime mortgage market, including loan assumptions and market weaknesses exposed during the crisis. Compare the Leverage Cycle theory with the Capital Asset Pricing Model (CAPM) and trace its application in recent financial history. Conclude by discussing the negative implications of the Leverage Cycle and its significance in understanding financial markets.