Price Discovery in the Residential Mortgage-backed Security, Credit Default Swap, and ABX Markets
38 Pages Posted: 27 Nov 2017 Last revised: 21 Jan 2020
Date Written: January 16, 2020
Abstract
This paper analyzes price discovery among residential mortgage-backed securities (MBS), their credit default swaps (ABCDS), and the associated ABX contracts. VECM regressions show that the MBS and ABX markets lead price discovery over the ABCDS market. Neither the MBS nor the ABX market consistently dominate one another so that MBS and ABX markets respond to information simultaneously. Thus, while there is evidence that ABCDS were mispriced, there is no evidence for ABX market “overshooting” that was previously thought to have helped cause the recent mortgage market bubble and bust.
Keywords: Mortgage-backed Securities; Credit Default Swaps, Index Securities, Price Discovery, Information Efficiency, Credit Crisis
JEL Classification: G01, G14, G21, E44
Suggested Citation: Suggested Citation