Hedge funds, CDOs and the financial crisis: An empirical investigation of the “Magnetar trade”
AbstractThe so called Magnetar trade (a kind of capital structure arbitrage on the US housing market, using CDS and synthetic CDOs, and exploiting rating-dependent mispricing of risk) has gained a high publicity due to a Pulitzer Prize awarded media story from two journalists of ProPublica (an online news outlet). The story essentially claimed that the mortgage investment strategy of the hedge fund Magnetar during the period between 2006 and mid 2007 was based on a desire to construct CDO deals with riskier assets so that they could place bets that portions of their own deals would fail. This paper provides several pieces of evidence in line with the argument that tranches from Magnetar-sponsored CDOs present overly risky investments. However, investors and rating agencies appear to have adjusted their required spread levels and ratings to reflect this higher riskiness, at least to some extent.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Banking & Finance.
Volume (Year): 37 (2013)
Issue (Month): 2 ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/jbf
Arbitrage; Collateralized debt obligation; Credit default swap; Hedge funds;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Maciej Firla-Cuchra, 2005. "Explaining Launch Spreads on Structured Bonds," Economics Series Working Papers 230, University of Oxford, Department of Economics.
- Arnoud W A Boot & Anjan V Thakor, 1992.
CEPR Financial Markets Paper
0020, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ.
- repec:reg:rpubli:569 is not listed on IDEAS
- Jan Pieter Krahnen & Christian Wilde, 2009.
"CDOs and Systematic Risk: Why bond ratings are inadequate,"
Working Paper Series: Finance and Accounting
203, Department of Finance, Goethe University Frankfurt am Main.
- Krahnen, Jan Pieter & Wilde, Christian, 2009. "CDOs and systematic risk: Why bond ratings are inadequate," CFS Working Paper Series 2009/11, Center for Financial Studies (CFS).
- Hamerle, Alfred & Liebig, Thilo & Schropp, Hans-Jochen, 2009. "Systematic risk of CDOs and CDO arbitrage," Discussion Paper Series 2: Banking and Financial Studies 2009,13, Deutsche Bundesbank, Research Centre.
- Leslie E. Papke & Jeffrey M. Wooldridge, 1993.
"Econometric Methods for Fractional Response Variables with an Application to 401(k) Plan Participation Rates,"
NBER Technical Working Papers
0147, National Bureau of Economic Research, Inc.
- Papke, Leslie E & Wooldridge, Jeffrey M, 1996. "Econometric Methods for Fractional Response Variables with an Application to 401(K) Plan Participation Rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 619-32, Nov.-Dec..
- Mählmann, Thomas, 2012. "Did investors outsource their risk analysis to rating agencies? Evidence from ABS-CDOs," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1478-1491.
- Bernstein, Jake & Eisinger, Jesse, 2010. "The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going," Working paper 569, Regulation2point0.
- Joshua D. Coval & Jakub W. Jurek & Erik Stafford, 2009. "Economic Catastrophe Bonds," American Economic Review, American Economic Association, vol. 99(3), pages 628-66, June.
- Maciej Firla-Cuchra & Tim Jenkinson, 2005.
"Why are Securitization Issues Tranched?,"
OFRC Working Papers Series
2005fe04, Oxford Financial Research Centre.
- John M. Griffin & Dragon Yongjun Tang, 2012. "Did Subjectivity Play a Role in CDO Credit Ratings?," Journal of Finance, American Finance Association, vol. 67(4), pages 1293-1328, 08.
- Joshua Coval & Jakub Jurek & Erik Stafford, 2009. "The Economics of Structured Finance," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 3-25, Winter.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If references are entirely missing, you can add them using this form.