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Systematic and Liquidity Risk in Subprime-Mortgage Backed SecuritiesM

  • Thomas Flavin

    ()

    (Department of Economics Finance and Accounting, National University of Ireland, Maynooth)

  • Gerald P. Dwyer

    (Federal Reserve Bank of Atlanta, University of Carlos III, Madrid and CAMA)

  • Mardi Dungey

    (University of Tasmania, CFAP, University of Cambridge and CAMA)

The misevaluation of risk in securitized financial products is central to understand- ing the Financial Crisis of 2007-2008. This paper characterizes the evolution of factors affecting collateralized debt obligations (CDOs) based on subprime mortgages. A key feature of subprime-mortgage backed indices is that they are distinct in their vintage of issuance. Using a latent factor framework that incorporates this vintage effect, we show the increasing importance of a common factor on more senior tranches during the crisis. We examine this common factor and its relationship with spreads. We estimate the effects on the common factor of the financial crisis.

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File URL: http://repec.maynoothuniversity.ie/mayecw-files/N219-11.pdf
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Paper provided by Department of Economics, Finance and Accounting, National University of Ireland - Maynooth in its series Economics, Finance and Accounting Department Working Paper Series with number n219-11.

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Length: 42 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:may:mayecw:n219-11
Contact details of provider: Postal: Maynooth, Co. Kildare
Phone: 353-1-7083728
Fax: 353-1-7083934
Web page: http://www.maynoothuniversity.ie/economics-finance-and-accounting

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