Systematic and Liquidity Risk in Subprime-Mortgage Backed Securities

Mardi Dungey; Gerald P. Dwyer; Thomas Flavin

doi:10.1007/s11079-012-9254-4

Systematic and Liquidity Risk in Subprime-Mortgage Backed Securities

Mardi Dungey, Gerald P. Dwyer, Thomas Flavin

Indonesia Project

Research output: Contribution to journal › Article › peer-review

6 Citations (Scopus)

Abstract

The misevaluation of risk in securitized financial products is central to understanding 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 of the financial crisis on the common factor.

Original language	English
Pages (from-to)	5-32
Number of pages	28
Journal	Open Economies Review
Volume	24
Issue number	1
DOIs	https://doi.org/10.1007/s11079-012-9254-4
Publication status	Published - Feb 2013

Access to Document

10.1007/s11079-012-9254-4

Cite this

@article{b1a2be8996b147ee8f2c8a53975c7491,

title = "Systematic and Liquidity Risk in Subprime-Mortgage Backed Securities",

abstract = "The misevaluation of risk in securitized financial products is central to understanding 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 of the financial crisis on the common factor.",

keywords = "Asset backed securities, Factor models, Financial crisis, Kalman filter, Subprime mortgages",

author = "Mardi Dungey and Dwyer, {Gerald P.} and Thomas Flavin",

year = "2013",

month = feb,

doi = "10.1007/s11079-012-9254-4",

language = "English",

volume = "24",

pages = "5--32",

journal = "Open Economies Review",

issn = "0923-7992",

publisher = "Springer Netherlands",

number = "1",

}

TY - JOUR

T1 - Systematic and Liquidity Risk in Subprime-Mortgage Backed Securities

AU - Dungey, Mardi

AU - Dwyer, Gerald P.

AU - Flavin, Thomas

PY - 2013/2

Y1 - 2013/2

N2 - The misevaluation of risk in securitized financial products is central to understanding 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 of the financial crisis on the common factor.

AB - The misevaluation of risk in securitized financial products is central to understanding 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 of the financial crisis on the common factor.

KW - Asset backed securities

KW - Factor models

KW - Financial crisis

KW - Kalman filter

KW - Subprime mortgages

UR - http://www.scopus.com/inward/record.url?scp=84872293637&partnerID=8YFLogxK

U2 - 10.1007/s11079-012-9254-4

DO - 10.1007/s11079-012-9254-4

M3 - Article

SN - 0923-7992

VL - 24

SP - 5

EP - 32

JO - Open Economies Review

JF - Open Economies Review

IS - 1

ER -

Systematic and Liquidity Risk in Subprime-Mortgage Backed Securities

Abstract

Access to Document

Other files and links

Fingerprint

Cite this