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Spillover of Mortgage Default Risks in the United States: Evidence from Metropolitan Statistical Areas and States

Author

Listed:
  • Qiang Ji

    (Center for Energy and Environmental Policy Research, Institutes of Science and Development, Chinese Academy of Sciences, Beijing, China)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Pretoria, South Africa)

  • Festus Victor Bekun

    (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus, Turkey)

  • Mehmet Balcilar

    (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus, Turkey and Montpellier Business School, Montpellier, France)

Abstract

This paper offers a new perspective to the analysis of spillover transmission in the housing market, specifically dealing with mortgage default risks. To do this, the recently developed generalized forecast error variance decomposition (FEVD) methodology proposed by Diebold and Yilmaz (2014) is utilized to investigate the degree of interconnectedness of mortgage default risks in metropolitan statistical areas (MSAs) and states of the U.S. The empirical findings, based on a real-time mortgage default risks index, reveal complex interconnectedness across twenty MSAs and forty-three states. Our study finds that Chicago, New York, and Los Angeles are net transmitters of spillover effects to other regions in the housing market investigated. This study also corroborates with the central place theory (CPT), as Washington DC serves as a key player in the housing market among the MSA’s. Amongst the states, Minnesota, followed by Arizona, Pennsylvania, New York and New Hampshire, are found to be the main source of mortgage default risks spillovers.

Suggested Citation

  • Qiang Ji & Rangan Gupta & Festus Victor Bekun & Mehmet Balcilar, 2018. "Spillover of Mortgage Default Risks in the United States: Evidence from Metropolitan Statistical Areas and States," Working Papers 201850, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201850
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    References listed on IDEAS

    as
    1. Diebold, Francis X. & Yılmaz, Kamil, 2014. "On the network topology of variance decompositions: Measuring the connectedness of financial firms," Journal of Econometrics, Elsevier, vol. 182(1), pages 119-134.
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    4. Chomsisengphet, Souphala & Kiefer, Hua & Liu, Xiaodong, 2018. "Spillover effects in home mortgage defaults: Identifying the power neighbor," Regional Science and Urban Economics, Elsevier, vol. 73(C), pages 68-82.
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    6. Sumit Agarwal & Brent W. Ambrose & Souphala Chomsisengphet & Anthony B. Sanders, 2012. "Thy Neighbor’s Mortgage: Does Living in a Subprime Neighborhood Affect One’s Probability of Default?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 40(1), pages 1-22, March.
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    More about this item

    Keywords

    Mortgage default risk; connectedness network; centrality; metropolitan statistical area; states; United States;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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