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Real Effects of the Subprime Mortgage Crisis

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  • Hui Tong
  • Shang-Jin Wei

Abstract

We develop a methodology to study how the subprime crisis spills over to the real economy. Does it manifest itself primarily through reducing consumer demand or through tightening liquidity constraint on non-financial firms? Since most non-financial firms have much larger cash holding than before, they appear unlikely to face significant liquidity constraint. We propose a methodology to estimate these two channels of spillovers. We first propose an index of a firm''s sensitivity to consumer demand, based on its response to the 9/11 shock in 2001. We then construct a separate firm-level index on financial constraint based on Whited and Wu (2006). We find that both channels are at work, but a tightened liquidity squeeze is economically more important than a reduced consumer spending in explaining cross firm differences in stock price declines.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/186.

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Length: 37
Date of creation: 01 Jul 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/186

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Keywords: Consumer credit; Borrowing; External shocks; Liquidity controls; Spillovers; Stock prices; stock price; financial sector; stock returns; cash flow; equation; standard deviation; correlation; financial institutions; financial dependence; standard errors; bond; statistical significance; survey; statistics; financial system; stock price performance; treasury bond; stock of debt; correlations; stock price index; dollar bond; samples; stock index; fitted value; standard error; stock price reaction; stock price reactions; measurement error; stock value; cash flow from operations; financial intermediation; optimization; statistical analyses; pessimistic forecast; financial stock; hedging; empirical measure; hedging strategies; discount rate; cash flows; significance level; financial markets; international finance; currency futures; extrapolation; significance levels; financial market; financial sector crises; statistically significant effect; currency risk; expectation sign; forecasting; new york stock exchange;

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References

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  1. Borensztein, Eduardo & Lee, Jong-Wha, 2002. "Financial crisis and credit crunch in Korea: evidence from firm-level data," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 853-875, May.
  2. Timothy Erickson & Toni M. Whited, 2000. "Measurement Error and the Relationship between Investment and q," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 1027-1057, October.
  3. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison," NBER Working Papers 13761, National Bureau of Economic Research, Inc.
  4. Raghuram G. Rajan & Luigi Zingales, . "Financial Dependence and Growth," CRSP working papers 344, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  5. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W, 1994. " Contrarian Investment, Extrapolation, and Risk," Journal of Finance, American Finance Association, vol. 49(5), pages 1541-78, December.
  6. Giovanni Dell'Ariccia & Raghuram Rajan & Enrica Detragiache, 2005. "The Real Effect of Banking Crises," IMF Working Papers 05/63, International Monetary Fund.
  7. Kathryn M. E. Dominguez & Linda L. Tesar, 2001. "A Reexamination of Exchange-Rate Exposure," American Economic Review, American Economic Association, vol. 91(2), pages 396-399, May.
  8. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  9. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
  10. Lamont, Owen & Polk, Christopher & Saa-Requejo, Jesus, 2001. "Financial Constraints and Stock Returns," Review of Financial Studies, Society for Financial Studies, vol. 14(2), pages 529-54.
  11. Atif Mian & Amir Sufi, 2008. "The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis," NBER Working Papers 13936, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Duchin, Ran & Ozbas, Oguzhan & Sensoy, Berk A., 2010. "Costly external finance, corporate investment, and the subprime mortgage credit crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 418-435, September.
  2. Stijn Claessens & Hui Tong & Shang-Jin Wei, 2011. "From the Financial Crisis to the Real Economy: Using Firm-level Data to Identify Transmission Channels," NBER Chapters, in: Global Financial Crisis National Bureau of Economic Research, Inc.
  3. Felicia Ramona Birau, 2012. "Financial Derivatives - Meanings Beyond Subprime Crisis Stigma," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 4, pages 195-199, December.
  4. Hui Tong & Shang-Jin Wei, 2009. "The Composition Matters," IMF Working Papers 09/164, International Monetary Fund.
  5. Hui Tong & Shang-Jin Wei, 2009. "The Composition Matters: Capital Inflows and Liquidity Crunch during a Global Economic Crisis," NBER Working Papers 15207, National Bureau of Economic Research, Inc.
  6. Garcia-Appendini, Emilia & Montoriol-Garriga, Judit, 2013. "Firms as liquidity providers: Evidence from the 2007–2008 financial crisis," Journal of Financial Economics, Elsevier, vol. 109(1), pages 272-291.
  7. Aisyah Rahman, 2010. "Financing structure and insolvency risk exposure of Islamic banks," Financial Markets and Portfolio Management, Springer, vol. 24(4), pages 419-440, December.
  8. Orlowski, Lucjan T., 2008. "Stages of the 2007/2008 Global Financial Crisis Is There a Wandering Asset-Price Bubble?," Economics Discussion Papers 2008-43, Kiel Institute for the World Economy.
  9. Fratzscher, Marcel, 2011. "Capital flows, push versus pull factors and the global financial crisis," Working Paper Series 1364, European Central Bank.
  10. De La Motte, Laura & Czernomoriez, Janna & Clemens, Marius, 2010. "Zur Vertrauensökonomik: Der Interbankenmarkt in der Krise von 2007-2009
    [Economics of trust: The interbank market during the crisis 2007-2009]
    ," MPRA Paper 20357, University Library of Munich, Germany.
  11. Lucjan T. Orlowski, 2008. "Stages of the Ongoing Global Financial Crisis: Is There a Wandering Asset-Price Bubble?," CASE Network Studies and Analyses 0372, CASE-Center for Social and Economic Research.
  12. Grancay, Martin, 2008. "Hypotekarna a financna kriza 2008: Priciny, opatrenia, dosledky
    [The mortgage and financial crisis of 2008: Causes, measures taken, impacts]
    ," MPRA Paper 16489, University Library of Munich, Germany.

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