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CDO market implosion and the pricing of subprime mortgage-backed securities

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Author Info

  • Deng, Yongheng
  • Gabriel, Stuart A.
  • Sanders, Anthony B.

Abstract

We evaluate the effects of CDO issuance on the pricing of subprime residential mortgage-backed securities. Upon controlling for mortgage option values and other well-established determinants of credit spreads, GMM results indicate that the emergence and rapid capitalization of the subprime-backed CDO market was associated with a significant tightening of subprime MBS-Treasury yield spreads. Results of VAR and other robustness tests serve to corroborate the findings. Dynamic simulation based on the impulse response function estimates indicates substantial subprime MBS spread widening in the wake of the recent implosion in the CDO market. Research findings suggest the importance of supply/demand shocks associated with innovations in derivative securities markets to the pricing of securitized subprime debt.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Housing Economics.

Volume (Year): 20 (2011)
Issue (Month): 2 (June)
Pages: 68-80

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Handle: RePEc:eee:jhouse:v:20:y:2011:i:2:p:68-80

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Web page: http://www.elsevier.com/locate/inca/622881

Related research

Keywords: Collateralized debt obligations Subprime crisis Yield spreads on mortgage-backed securities;

References

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Cited by:
  1. 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.
  2. Sheri M. Markose & Bewaji Oluwasegun & Simone Giansante, 2012. "Multi-Agent Financial Network (MAFN) Model of US Collateralized Debt Obligations (CDO): Regulatory Capital Arbitrage, Negative CDS Carry Trade and Systemic Risk Analysis," Economics Discussion Papers 714, University of Essex, Department of Economics.

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