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.
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Bibliographic InfoPaper provided by Singapore Management University, School of Economics in its series Working Papers with number 12-2006.
Length: 32 pages
Date of creation: Mar 2006
Date of revision:
Publication status: Published in SMU Economics and Statistics Working Paper Series
Other versions of this item:
- Winston T.H. Koh & Roberto S. Mariano & Andrey Pavlovb & Sock Yong Phang & Augustine H. H. Tan & Susan M. Wachter, 2006. "Underpriced Default Spread Exacerbates Market Crashes," Finance Working Papers 22458, East Asian Bureau of Economic Research.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-08-26 (All new papers)
- NEP-BAN-2006-08-26 (Banking)
- NEP-FMK-2006-08-26 (Financial Markets)
- NEP-SEA-2006-08-26 (South East Asia)
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.:
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