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

See all articles by Michael B. Imerman

Michael B. Imerman

University of California, Irvine - Paul Merage School of Business

Joseph R. Mason

Louisiana State University - Ourso School of Business; University of Pennsylvania - Wharton Financial Institutions Center

Rajesh Narayanan

Louisiana State University

Meredith E. Rhodes

University of North Texas, Ryan College of Business, Department of Finance, Insurance, Real Estate and Law

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

Imerman, Michael B. and Mason, Joseph R. and Narayanan, Rajesh and Rhodes, Meredith, Price Discovery in the Residential Mortgage-backed Security, Credit Default Swap, and ABX Markets (January 16, 2020). Available at SSRN: https://ssrn.com/abstract=3074878 or http://dx.doi.org/10.2139/ssrn.3074878

Michael B. Imerman

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA 92697-3125
United States

Joseph R. Mason (Contact Author)

Louisiana State University - Ourso School of Business

2900 Business Education Complex
Baton Rouge, LA 70803
United States
202-683-8909 (Phone)

University of Pennsylvania - Wharton Financial Institutions Center ( email )

3641 Locust Walk
Philadelphia, PA 19104-6218
United States

Rajesh Narayanan

Louisiana State University ( email )

Baton Rouge, LA 70803-6308
United States
225-578-6236 (Phone)

Meredith Rhodes

University of North Texas, Ryan College of Business, Department of Finance, Insurance, Real Estate and Law ( email )

Denton, TX 76203
United States

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