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Speculative funding and its impact on subprime mortgage product pricing

Author

Listed:
  • J. Mukuddem-Petersen
  • M. A. Petersen
  • T. Bosch
  • B. De Waal

Abstract

We address the impact of speculative mortgage funding on the pricing of subprime residential mortgage loans (measured by risk premia) and securities backed by these mortgages (measured by ABX.HE indices). In this regard, we make use of techniques involving multivariate Vector Autoregressive (VAR) models and Generalized Impulse Response Functions (GIRFs) in order to study the shocks related to this type of funding. More specifically, the VAR model utilized in this article estimates individual regressions within a system where all mortgage variables are endogenously determined. Furthermore, the aforementioned response functions provide a means of determining the impact of shocks within a given horizon. Our main conclusions are that mortgage price is most significantly affected by shocks from mortgage rates, while, for ABX price, shocks to speculative mortgage funding, ABX price, mortgagor risk characteristics and prepayment rate elicit significant responses. In addition, our findings indicate that speculative mortgage funding has driven up mortgage and ABX price and contributes to increased volatility in related markets.

Suggested Citation

  • J. Mukuddem-Petersen & M. A. Petersen & T. Bosch & B. De Waal, 2011. "Speculative funding and its impact on subprime mortgage product pricing," Applied Financial Economics, Taylor & Francis Journals, vol. 21(19), pages 1397-1408.
  • Handle: RePEc:taf:apfiec:v:21:y:2011:i:19:p:1397-1408
    DOI: 10.1080/09603107.2011.572850
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    References listed on IDEAS

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    1. Ingo Fender & Martin Scheicher, 2009. "The pricing of subprime mortgage risk in good times and bad: evidence from the ABX.HE indices," Applied Financial Economics, Taylor & Francis Journals, vol. 19(24), pages 1925-1945.
    2. Gregory E. Elliehausen & Min Hwang, 2010. "Mortgage contract choice in subprime mortgage markets," Finance and Economics Discussion Series 2010-53, Board of Governors of the Federal Reserve System (U.S.).
    3. Scheicher, Martin & Fender, Ingo, 2009. "The pricing of subprime mortgage risk in good times and bad: evidence from the ABX.HE indices," Working Paper Series 1056, European Central Bank.
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