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Systematic and Liquidity Risk in Subprime-Mortgage Backed Securities

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  • Mardi Dungey
  • Gerald Dwyer

    ()

  • Thomas Flavin

Abstract

The misevaluation of risk in securitized financial products is central to understanding the Financial Crisis of 2007–2008. This paper characterizes the evolution of factors affecting collateralized debt obligations (CDOs) based on subprime mortgages. A key feature of subprime-mortgage backed indices is that they are distinct in their vintage of issuance. Using a latent factor framework that incorporates this vintage effect, we show the increasing importance of a common factor on more senior tranches during the crisis. We examine this common factor and its relationship with spreads. We estimate the effects of the financial crisis on the common factor. Copyright Springer Science+Business Media New York 2013

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File URL: http://hdl.handle.net/10.1007/s11079-012-9254-4
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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 24 (2013)
Issue (Month): 1 (February)
Pages: 5-32

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Handle: RePEc:kap:openec:v:24:y:2013:i:1:p:5-32

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: Asset backed securities; Subprime mortgages; Financial crisis; Factor models; Kalman filter; G12; G01; C32;

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Cited by:
  1. Dungey, Mardi & Luciani, Matteo & Veredas, David, 2012. "Ranking systemically important financial institutions," Working Papers 15473, University of Tasmania, School of Economics and Finance, revised 21 Nov 2012.
  2. Alessandro Flamini & Iftekhar Hasan & Costas Milas, 2014. "Open-economy Distribution Forecast Targeting, Macroeconomic Volatility and Financial Implication," DEM Working Papers Series 080, University of Pavia, Department of Economics and Management.

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