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Systematic and Liquidity Risk in Subprime-Mortgage Backed Securities

  • Dungey, Mardi

    ()

  • Dwyer, Gerald P.
  • Flavin, Thomas

    (School of Economics and Finance, University of Tasmania)

The misevaluation of risk in securitized ?nancial products is central to understand- ing the Financial Crisis of 2007-2008. This paper characterizes the evolution of factors a¤ecting 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 e¤ect, 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 e¤ects on the common factor of the ?nancial crisis.

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File URL: http://eprints.utas.edu.au/11817/1/DP2011_06_Dungey_Dwyer_Flavin.pdf
File Function: First version, 2011
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Paper provided by University of Tasmania, School of Economics and Finance in its series Working Papers with number 11817.

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Length: 44 pages
Date of creation: Aug 2011
Date of revision:
Publication status: Published by University of Tasmania, School of Economics & Finance -Thesis 2006
Handle: RePEc:tas:wpaper:11817
Contact details of provider: Postal: Private Bag 85, Hobart, Tasmania 7001
Phone: +61 3 6226 7672
Fax: +61 3 6226 7587
Web page: http://www.utas.edu.au/economics-finance/

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  1. Sébastien Laurent & Luc Bauwens & Jeroen V. K. Rombouts, 2006. "Multivariate GARCH models: a survey," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(1), pages 79-109.
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  11. 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.
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  16. Eichengreen, Barry & Mody, Ashoka & Nedeljkovic, Milan & Sarno, Lucio, 2012. "How the Subprime Crisis went global: Evidence from bank credit default swap spreads," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 1299-1318.
  17. Lumsdaine, Robin L, 1996. "Consistency and Asymptotic Normality of the Quasi-maximum Likelihood Estimator in IGARCH(1,1) and Covariance Stationary GARCH(1,1) Models," Econometrica, Econometric Society, vol. 64(3), pages 575-96, May.
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