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Were there fire sales in the RMBS market?

Author

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  • Merrill, Craig B.
  • Nadauld, Taylor D.
  • Stulz, René M.
  • Sherlun, Shane M.

Abstract

Many observers have argued that the fall in RMBS prices during the crisis was partly caused by fire sales. Using a unique dataset of RMBS transactions for insurance companies, we show evidence supportive of a role, at the transaction level, of forced sales that occurred at discounted prices relative to fundamentals, and find that the RMBS market behaved as a whole as would be expected in the presence of fire sales. We show that risk-sensitive capital requirements and mark-to-market accounting can jointly create incentives for financial institutions subject to adverse capital shocks to sell stressed securities.

Suggested Citation

  • Merrill, Craig B. & Nadauld, Taylor D. & Stulz, René M. & Sherlun, Shane M., 2021. "Were there fire sales in the RMBS market?," Journal of Monetary Economics, Elsevier, vol. 122(C), pages 17-37.
    • Handle: RePEc:eee:moneco:v:122:y:2021:i:c:p:17-37
    DOI: 10.1016/j.jmoneco.2021.05.007
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    1. Aiello, Darren J., 2022. "Financially constrained mortgage servicers," Journal of Financial Economics, Elsevier, vol. 144(2), pages 590-610.

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    More about this item

    Keywords

    Fire sales; RMBS; Capital requirement; Mark-to-market accounting; Subprime crisis;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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