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The role of U.S. subprime mortgage-backed assets in propagating the crisis:contagion or interdependence?

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  • Thomas Flavin

    () (Department of Economics, Finance and Accounting, Maynooth University.)

  • Lisa Sheenan

    (Central Bank of Ireland, Spencer Dock, Dublin 1, Ireland.)

Abstract

Though relatively small, the subprime mortgage-backed securities market is often identified as the source of the crisis that swept through the U.S. financial system from 2007 onwards. We investigate if its role in the propagation of the crisis was due to contagion or interdependence. Using a Markov-switching VAR with time-varying transition probabilities, we analyze the transmission of shocks across the financial system. We find little evidence of asset correlation changes between normal and crisis regimes and those that do occur are predominantly associated with liquidity variables. Otherwise, relationships are stable across market conditions, implying that the U.S. financial crisis was due to cross-market interdependencies rather than contagion. There is limited evidence that the deteriorating quality of the underlying assets can explain the transition from 'normal' market conditions to a high-volatility regime although his is not consistent across model specifications.

Suggested Citation

  • Thomas Flavin & Lisa Sheenan, 2015. "The role of U.S. subprime mortgage-backed assets in propagating the crisis:contagion or interdependence?," Economics, Finance and Accounting Department Working Paper Series n260-15.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  • Handle: RePEc:may:mayecw:n260-15.pdf
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    1. repec:eme:ijmfpp:ijmf-02-2017-0018 is not listed on IDEAS
    2. Yang, Lu & Cai, Xiao Jing & Zhang, Huimin & Hamori, Shigeyuki, 2016. "Interdependence of foreign exchange markets: A wavelet coherence analysis," Economic Modelling, Elsevier, vol. 55(C), pages 6-14.
    3. Bogataj, David & McDonnell, Diego Ros & Bogataj, Marija, 2016. "Management, financing and taxation of housing stock in the shrinking cities of aging societies," International Journal of Production Economics, Elsevier, vol. 181(PA), pages 2-13.

    More about this item

    Keywords

    Financial Crisis; Contagion; Subprime mortgage-backed securities; Markov-switching VAR.;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G2 - Financial Economics - - Financial Institutions and Services

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