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Systematic and Liquidity Risk in Subprime-Mortgage Backed Securities

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  • Dungey, Mardi

    ()

  • Dwyer, Gerald P.
  • Flavin, Thomas

    (School of Economics and Finance, University of Tasmania)

Abstract

The misevaluation of risk in securitized ?nancial products is central to understand- ing the Financial Crisis of 2007-2008. This paper characterizes the evolution of factors a¤ecting collateralized debt obligations (CDOs) 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 e¤ect, 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 e¤ects on the common factor of the ?nancial crisis.

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File URL: http://eprints.utas.edu.au/11817/1/DP2011_06_Dungey_Dwyer_Flavin.pdf
File Function: First version, 2011
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Bibliographic Info

Paper provided by University of Tasmania, School of Economics and Finance in its series Working Papers with number 11817.

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Length: 44 pages
Date of creation: Aug 2011
Date of revision:
Publication status: Published by University of Tasmania, School of Economics & Finance -Thesis 2006
Handle: RePEc:tas:wpaper:11817

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Web page: http://www.utas.edu.au/economics-finance/
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Keywords: Consumer Economics: Theory; Consumer Economics: Empirical Analysis; Demographic Economics;

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Cited by:
  1. Dungey, Mardi & Luciani, Matteo & Veredas, David, 2012. "Ranking systemically important financial institutions," Working Papers 15473, University of Tasmania, School of Economics and Finance, revised 21 Nov 2012.

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