Underpriced Default Spread Exacerbates Market Crashes
AbstractIn this paper, we develop a specific observable symptom of a banking system that underprices the default spread in non-recourse asset-backed lending. Using three different data sets for 18 countries and property types, we find that, following a negative demand shock, the underpricing economies experience far deeper asset market crashes than economies in which the put option is correctly priced. Furthermore, only one of the countries in our sample continues to exhibit the underpricing symptom following a market crash. This indicates that market crashes have a cleansing effect and eliminate underpricing at least for a period of time. This makes investing in such markets safer following a negative demand shock.
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 InfoPaper provided by East Asian Bureau of Economic Research in its series Finance Working Papers with number 22458.
Date of creation: Jan 2006
Date of revision:
Contact details of provider:
Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200
Web page: http://www.eaber.org
More information through EDIRC
real estate bubble; lender optimism; disaster myopia; Asian financial crisis;
Other versions of this item:
- Winston T. H. Koh & Roberto S. Mariano & Andrey Pavlov & Sock Yong Phang & Augustine H. H. Tan & Susan M. Wachter, 2006. "Underpriced Default Spread Exacerbates Market Crashes," Working Papers 12-2006, Singapore Management University, School of Economics.
- G01 - Financial Economics - - General - - - Financial Crises
- L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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.:
- Jonathan McCarthy & Richard W. Peach, 2004. "Are home prices the next "bubble"?," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 1-17.
- Karl E. Case & Robert J. Shiller, 2003. "Is There a Bubble in the Housing Market?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2), pages 299-362.
- Richard J. Herring & Susan Wachter, 1999. "Real Estate Booms and Banking Busts: An International Perspective," Center for Financial Institutions Working Papers 99-27, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Franklin Allen & Douglas Gale, 1998.
"Optimal Financial Crises,"
Journal of Finance,
American Finance Association, vol. 53(4), pages 1245-1284, 08.
- Franklin Allen, 2001. "Presidential Address: Do Financial Institutions Matter?," Journal of Finance, American Finance Association, vol. 56(4), pages 1165-1175, 08.
- John Krainer & Chishen Wei, 2004. "House prices and fundamental value," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct1.
- Roberto S. Mariano, 2009.
"Misaligned Incentives and Mortgage Lending in Asia,"
07-2009, Singapore Management University, School of Economics.
- Richard Green & Roberto Mariano & Andrey Pavlov & Susan Wachter, 2009. "Misaligned Incentives and Mortgage Lending in Asia," NBER Chapters, in: Financial Sector Development in the Pacific Rim, East Asia Seminar on Economics, Volume 18, pages 95-111 National Bureau of Economic Research, Inc.
- Richard Green & Robert Mariano & Andrey Pavlov & Susan Wachter, 2009. "Misaligned Incentives and Mortgage Lending in Asia," Microeconomics Working Papers 22422, East Asian Bureau of Economic Research.
- Andrey Pavlov & Susan Wachter, 2009. "Mortgage Put Options and Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 38(1), pages 89-103, January.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shiro Armstrong).
If references are entirely missing, you can add them using this form.