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Assessing the effectiveness of the Paulson "teaser freezer" Plan: Evidence from the ABX index

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  • Balla, Eliana
  • Carpenter, Robert E.
  • Robinson, Breck L.
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    Abstract

    How did investors holding assets backed by subprime residential mortgages react when Treasury Secretary Paulson announced the so-called "teaser freezer" plan to modify mortgages in December 2007? We apply event-study methodology to the ABX index, the only source of daily securities prices in subprime mortgage markets. Our results show that investors initially perceived that the Paulson Plan would improve conditions in subprime housing markets. Specifically, those investors who held the riskiest securities backed by subprime residential housing benefited the most from the Paulson Plan. These findings do not extend to the longer term, suggesting that any positive effects from Paulson Plan were overwhelmed by the continued deterioration in housing markets.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0148619511000300
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economics and Business.

    Volume (Year): 63 (2011)
    Issue (Month): 5 (September)
    Pages: 392-411

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    Handle: RePEc:eee:jebusi:v:63:y:2011:i:5:p:392-411

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    Web page: http://www.elsevier.com/locate/jeconbus

    Related research

    Keywords: Mortgage loan modifications ABX index Event study;

    References

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    1. Ingo Fender & Martin Scheicher, 2008. "The ABX: how do the markets price subprime mortgage risk?," BIS Quarterly Review, Bank for International Settlements, September.
    2. Longstaff, Francis A., 2010. "The subprime credit crisis and contagion in financial markets," Journal of Financial Economics, Elsevier, vol. 97(3), pages 436-450, September.
    3. Foote, Christopher L. & Gerardi, Kristopher & Willen, Paul S., 2008. "Negative equity and foreclosure: Theory and evidence," Journal of Urban Economics, Elsevier, vol. 64(2), pages 234-245, September.
    4. Clemente, Jesus & Montanes, Antonio & Reyes, Marcelo, 1998. "Testing for a unit root in variables with a double change in the mean," Economics Letters, Elsevier, vol. 59(2), pages 175-182, May.
    5. Asquith, Paul & Wizman, Thierry A., 1990. "Event risk, covenants, and bondholder returns in leveraged buyouts," Journal of Financial Economics, Elsevier, vol. 27(1), pages 195-213, September.
    6. Gary B. Gorton, 2008. "The Subprime Panic," NBER Working Papers 14398, National Bureau of Economic Research, Inc.
    7. Brown, Stephen J. & Warner, Jerold B., 1980. "Measuring security price performance," Journal of Financial Economics, Elsevier, vol. 8(3), pages 205-258, September.
    8. Asquith, Paul, 1948- & Wizman, Thierry A., 1990. "Event risk, covenants, and bondholder returns in leveraged buyouts," Working papers WP 3173-90., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    9. Mardi Dungey & Jerry Dwyer & Tom Flavin, 2009. "Vintage and credit rating: what matters in the ABX data during the credit crunch?," Proceedings, Federal Reserve Bank of San Francisco, issue Jan.
    10. Wara, A. & Welch, I., 1990. "Bondholder Losses In Leveraged Buyouts," Papers fb-_90-04, Columbia - Graduate School of Business.
    11. 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.
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