Abstract

http://ssrn.com/abstract=1434686
 
 

References (21)



 
 

Citations (14)



 


 



The Bear's Lair: Indexed Credit Default Swaps and the Subprime Mortgage Crisis


Richard Stanton


University of California, Berkeley - Finance Group

Nancy Wallace


University of California, Berkeley - Real Estate Group

July 14, 2009


Abstract:     
ABX.HE indexed credit default swaps on baskets of mortgage-backed securities are now the main benchmark used by financial institutions to mark their subprime mortgage portfolios to market. However, we find that current prices for the ABX.HE indices are inconsistent with any finite assumption for mortgage default rates, and that ABX.HE price changes are uncorrelated with changes in the credit performance of the underlying loans. These results cast serious doubt on the suitability of the ABX.HE indices as valuation benchmarks. We also find that ABX.HE price changes are significantly related to short-sale activity in the option and equity markets of the publicly traded builders, the commercial banks, the investment banks and the government sponsored enterprises (GSEs). This suggests that capital constraints, limiting the supply of ABS insurance, may be playing a role here similar to that identified by Froot (2001) in the market for catastrophe insurance.

Number of Pages in PDF File: 29

Keywords: ABX.HE, credit default swaps, subprime crisis, limits to arbitrage

working papers series


Download This Paper

Date posted: July 16, 2009  

Suggested Citation

Stanton, Richard and Wallace, Nancy, The Bear's Lair: Indexed Credit Default Swaps and the Subprime Mortgage Crisis (July 14, 2009). Available at SSRN: http://ssrn.com/abstract=1434686 or http://dx.doi.org/10.2139/ssrn.1434686

Contact Information

Richard H. Stanton (Contact Author)
University of California, Berkeley - Finance Group ( email )
Haas School of Business
545 Student Services Building #1900
Berkeley, CA 94720-1900
United States
(510) 642-7382 (Phone)
(510) 643-1412 (Fax)
Nancy E. Wallace
University of California, Berkeley - Real Estate Group ( email )
Berkeley, CA 94720-1900
United States
Feedback to SSRN


Paper statistics
Abstract Views: 1,189
Downloads: 319
Download Rank: 53,273
References:  21
Citations:  14

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo5 in 0.531 seconds