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Equilibrium Subprime Lending

Author

Listed:
  • Igor Makarov

    (MIT Sloan - Sloan School of Management - MIT - Massachusetts Institute of Technology)

  • Guillaume Plantin

    (UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse, Tepper School of Business - CMU - Carnegie Mellon University [Pittsburgh])

Abstract

This paper develops an equilibrium model of a subprime mortgage market. Our goal is to offer a benchmark with which the recent subprime boom and bust can be compared. The model is tractable and delivers plausible orders of magnitude for borrowing capacities, as well as default and trading intensities. We offer simple explanations for several phenomena in the subprime market, such as the prevalence of teaser rates and the clustering of defaults. In our model, both nondiversifiable and diversifiable income risks reduce debt capacities. Thus, debt capacities need not be higher when a larger fraction of income risk is diversifiable.

Suggested Citation

  • Igor Makarov & Guillaume Plantin, 2013. "Equilibrium Subprime Lending," Post-Print hal-03399484, HAL.
    • Handle: RePEc:hal:journl:hal-03399484
    DOI: 10.1111/jofi.12022
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    Citations

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    Cited by:

    1. Eross, Andrea & Urquhart, Andrew & Wolfe, Simon, 2016. "Liquidity risk contagion in the interbank market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 45(C), pages 142-155.
    2. Tomasz Piskorski & Alexei Tchistyi, 2017. "An Equilibrium Model of Housing and Mortgage Markets with State-Contingent Lending Contracts," NBER Working Papers 23452, National Bureau of Economic Research, Inc.
    3. Alexei Tchistyi, 2018. "An Equilibrium Model of Housing and Mortgage Markets with State-Contingent Lending Contracts," 2018 Meeting Papers 244, Society for Economic Dynamics.
    4. Andrea Eross & Andrew Urquhart & Simon Wolfe, 2019. "Investigating risk contagion initiated by endogenous liquidity shocks: evidence from the US and eurozone interbank markets," The European Journal of Finance, Taylor & Francis Journals, vol. 25(1), pages 35-53, January.

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