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Jump and Cojump Risk in Subprime Home Equity Derivatives

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  • Bruce Mizrach

    ()
    (Rutgers University)

Abstract

I analyze the risk in the ABX index of asset backed, subprime, home equity credit default swaps and CME housing futures. Using estimators of the jump and cojump components of security prices, I determine that: (1) jump risk was rising throughout 2006, well before any problems in the mortgage market were discussed in the press or policy circles; (2) news explains up to 40% of the jump risk in the AAA rated ABX index and 24% in the BBB-; (3) The jump risk between the ABX and housing futures market is inversely related; (4) the slope of the housing futures term structure is significantly related to the jump risk.

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Bibliographic Info

Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 200802.

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Length: 20 pages
Date of creation: 01 Feb 2008
Date of revision:
Handle: RePEc:rut:rutres:200802

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Related research

Keywords: asset backed credit default swaps; housing futures; subprime; jump risk; cojumps;

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Cited by:
  1. Andrea Coppola & Alessandro Girardi & Gustavo Piga, 2012. "Overcrowding Versus Liquidity in the Euro Sovereign Bond Markets," CEIS Research Paper 222, Tor Vergata University, CEIS, revised 20 Feb 2012.
  2. Ingo Fender & Martin Scheicher, 2008. "The ABX: how do the markets price subprime mortgage risk?," BIS Quarterly Review, Bank for International Settlements, September.
  3. Fender, Ingo & Scheicher, Martin, 2009. "The pricing of subprime mortgage risk in good times and bad: evidence from the ABX.HE indices," Working Paper Series 1056, European Central Bank.
  4. Caporale, Guglielmo Maria & Girardi, Alessandro, 2013. "Price discovery and trade fragmentation in a multi-market environment: Evidence from the MTS system," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 227-240.
  5. Bruce Mizrach, 2012. "Comment on "Endogenous and Systemic Risk"," NBER Chapters, in: Quantifying Systemic Risk, pages 94-105 National Bureau of Economic Research, Inc.
  6. Lee, Yung-Tsung & Wang, Chou-Wen & Huang, Hong-Chih, 2012. "On the valuation of reverse mortgages with regular tenure payments," Insurance: Mathematics and Economics, Elsevier, vol. 51(2), pages 430-441.
  7. Giovanni, Calice, 2011. "The subprime asset-backed securities market and the equity prices of large complex financial institutions," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(4), pages 585-604, October.
  8. Melisso Boschi & Massimiliano Marzo & Simone Salotti, 2013. "Domestic Versus International Determinants Of European Business Cycles: A GVAR Approach," CAMA Working Papers 2013-28, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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