Abstract

http://ssrn.com/abstract=1356630
 
 

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CDO Market Implosion and the Pricing of Subprime Mortgage-Backed Securities


Yongheng Deng


National University of Singapore, Business School and the School of Design and Environment; National University of Singapore (NUS) - Institute of Real Estate Studies

Stuart A. Gabriel


University of California, Los Angeles - Anderson School of Management

Anthony B. Sanders


George Mason University - School of Management

March 1, 2009


Abstract:     
We evaluate the effects of CDO issuance on the pricing of subprime mortgage-backed securities. Upon controlling for mortgage option values and other well-established determinants of credit spreads, GMM results indicate that the emergence and rapid capitalization of the subprime-backed CDO market was associated with a significant tightening of subprime MBS/Treasury yield spreads. Results of VAR and other robustness tests serve to corroborate the findings. Dynamic simulation based on the impulse response functions shows substantial subprime MBS spread widening in the wake of implosion in the CDO market. Those effects likely were passed back to the primary market in the form of diminished investor demand and related reduced pricing of subprime loans. Research findings also suggest the importance of supply/demand shocks associated with innovations in derivative securities markets to the pricing of securitized subprime debt.

Number of Pages in PDF File: 42

Keywords: collateralized debt obligations, subprime crisis, yield spreads on mortgage-backed securities

JEL Classification: R31, G10, G12, G01

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Date posted: March 11, 2009 ; Last revised: September 7, 2010

Suggested Citation

Deng, Yongheng and Gabriel, Stuart A. and Sanders, Anthony B., CDO Market Implosion and the Pricing of Subprime Mortgage-Backed Securities (March 1, 2009). Available at SSRN: http://ssrn.com/abstract=1356630 or http://dx.doi.org/10.2139/ssrn.1356630

Contact Information

Yongheng Deng (Contact Author)
National University of Singapore, Business School and the School of Design and Environment ( email )
4 Architecture Drive
Singapore 117566
Singapore
(65) 6516 8291 (Phone)
(65) 6774 1003 (Fax)
HOME PAGE: http://www.ires.nus.edu.sg
National University of Singapore (NUS) - Institute of Real Estate Studies ( email )
Singapore
Stuart A. Gabriel
University of California, Los Angeles - Anderson School of Management ( email )
110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
310-825-2922 (Phone)
310-206-5455 (Fax)
HOME PAGE: http://www.anderson.ucla.edu
Anthony Bown Sanders
George Mason University - School of Management ( email )
Fairfax, VA 22030
United States
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