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Systematic and liquidity risk in subprime-mortgage backed securities

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  • Mardi Dungey
  • Gerald P. Dwyer
  • Thomas Flavin

Abstract

The misevaluation of risk in securitized financial products is central to understanding the financial crisis of 2007–8. This paper characterizes the evolution of factors affecting collateralized debt obligations 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 on the common factor of the financial crisis.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2011-15.

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Date of creation: 2011
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Handle: RePEc:fip:fedawp:2011-15

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  1. Gary B. Gorton, 2009. "Information, Liquidity, and the (Ongoing) Panic of 2007," NBER Working Papers 14649, National Bureau of Economic Research, Inc.
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  3. Silvennoinen, Annastiina & Teräsvirta, Timo, 2007. "Multivariate GARCH models," Working Paper Series in Economics and Finance 669, Stockholm School of Economics, revised 18 Jan 2008.
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  17. Ingo Fender & Martin Scheicher, 2009. "The pricing of subprime mortgage risk in good times and bad: evidence from the ABX.HE indices," BIS Working Papers 279, Bank for International Settlements.
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  19. Atif Mian & Amir Sufi, 2009. "The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis," The Quarterly Journal of Economics, MIT Press, vol. 124(4), pages 1449-1496, November.
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