IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v37y2013i2p537-548.html
   My bibliography  Save this article

Hedge funds, CDOs and the financial crisis: An empirical investigation of the “Magnetar trade”

Author

Listed:
  • Mählmann, Thomas

Abstract

The so called Magnetar trade (a kind of capital structure arbitrage on the US housing market, using CDS and synthetic CDOs, and exploiting rating-dependent mispricing of risk) has gained a high publicity due to a Pulitzer Prize awarded media story from two journalists of ProPublica (an online news outlet). The story essentially claimed that the mortgage investment strategy of the hedge fund Magnetar during the period between 2006 and mid 2007 was based on a desire to construct CDO deals with riskier assets so that they could place bets that portions of their own deals would fail. This paper provides several pieces of evidence in line with the argument that tranches from Magnetar-sponsored CDOs present overly risky investments. However, investors and rating agencies appear to have adjusted their required spread levels and ratings to reflect this higher riskiness, at least to some extent.

Suggested Citation

  • Mählmann, Thomas, 2013. "Hedge funds, CDOs and the financial crisis: An empirical investigation of the “Magnetar trade”," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 537-548.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:2:p:537-548
    DOI: 10.1016/j.jbankfin.2012.09.017
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378426612002932
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hamerle, Alfred & Liebig, Thilo & Schropp, Hans-Jochen, 2009. "Systematic risk of CDOs and CDO arbitrage," Discussion Paper Series 2: Banking and Financial Studies 2009,13, Deutsche Bundesbank.
    2. Maciej Firla-Cuchra & Tim Jenkinson, 2005. "Why are Securitization Issues Tranched?," OFRC Working Papers Series 2005fe04, Oxford Financial Research Centre.
    3. Boot, Arnoud W A & Thakor, Anjan V, 1993. " Security Design," Journal of Finance, American Finance Association, vol. 48(4), pages 1349-1378, September.
    4. Joshua D. Coval & Jakub W. Jurek & Erik Stafford, 2009. "Economic Catastrophe Bonds," American Economic Review, American Economic Association, vol. 99(3), pages 628-666, June.
    5. Jan Pieter Krahnen & Christian Wilde, 2009. "CDOs and Systematic Risk: Why bond ratings are inadequate," Working Paper Series: Finance and Accounting 203, Department of Finance, Goethe University Frankfurt am Main.
    6. Papke, Leslie E & Wooldridge, Jeffrey M, 1996. "Econometric Methods for Fractional Response Variables with an Application to 401(K) Plan Participation Rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 619-632, Nov.-Dec..
    7. Mählmann, Thomas, 2012. "Did investors outsource their risk analysis to rating agencies? Evidence from ABS-CDOs," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1478-1491.
    8. John M. Griffin & Dragon Yongjun Tang, 2012. "Did Subjectivity Play a Role in CDO Credit Ratings?," Journal of Finance, American Finance Association, vol. 67(4), pages 1293-1328, August.
    9. repec:reg:rpubli:569 is not listed on IDEAS
    10. Joshua Coval & Jakub Jurek & Erik Stafford, 2009. "The Economics of Structured Finance," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 3-25, Winter.
    11. Maciej Firla-Cuchra, 2005. "Explaining Launch Spreads on Structured Bonds," Economics Series Working Papers 230, University of Oxford, Department of Economics.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Arbitrage; Collateralized debt obligation; Credit default swap; Hedge funds;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:37:y:2013:i:2:p:537-548. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/jbf .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.