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The risk-relevance of securitizations during the recent financial crisis

Author

Listed:
  • Yiwei Dou

    (New York University)

  • Yanju Liu

    (Singapore Management University)

  • Gordon Richardson

    (University of Toronto)

  • Dushyantkumar Vyas

    (University of Toronto
    University of Toronto)

Abstract

We investigate changes in the risk-relevance of securitized subprime, other nonconforming, and commercial mortgages for sponsor-originators during the recent financial crisis. Using the volatility of realized stock returns, option-implied volatility, and credit spreads, we observe a pronounced increase in the risk-relevance of subprime securitizations as early as 2006. Furthermore, reflecting the evolution of the financial crisis in waves, we find that investors recognized the increased credit risk of other nonconforming and commercial mortgage securitizations as the financial crisis progressed. Additional analyses show that risk-relevance varies cross-sectionally with structural characteristics such as monoline credit-enhancement and the presence of special servicers for commercial mortgage securitizations. Our results inform the current debates on the opacity of securitization structures and highlight the need to take into account cross-sectional and inter-temporal heterogeneity in risk-relevance across securitized asset classes and securitization characteristics (e.g., quality and type of collateral and transaction structure).

Suggested Citation

  • Yiwei Dou & Yanju Liu & Gordon Richardson & Dushyantkumar Vyas, 2014. "The risk-relevance of securitizations during the recent financial crisis," Review of Accounting Studies, Springer, vol. 19(2), pages 839-876, June.
    • Handle: RePEc:spr:reaccs:v:19:y:2014:i:2:d:10.1007_s11142-013-9265-4
    DOI: 10.1007/s11142-013-9265-4
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    References listed on IDEAS

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    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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