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Systematic and Liquidity Risk in Subprime-Mortgage Backed Securities

43 Pages Posted: 12 Sep 2011  

Mardi H. Dungey

University of Tasmania; Financial Research Network (FIRN)

Gerald P. Dwyer

Clemson University; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Thomas Flavin

National University of Ireland, Maynooth (NUI Maynooth) - Department of Economics

Date Written: August 2011

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 on the common factor of the financial crisis.

Keywords: asset backed securities, subprime mortgages, financial crisis, factor models, Kalman Filter

JEL Classification: G12, G01, C32

Suggested Citation

Dungey, Mardi H. and Dwyer, Gerald P. and Flavin, Thomas, Systematic and Liquidity Risk in Subprime-Mortgage Backed Securities (August 2011). Available at SSRN: https://ssrn.com/abstract=1925930 or http://dx.doi.org/10.2139/ssrn.1925930

Mardi H. Dungey (Contact Author)

University of Tasmania ( email )

French Street
Sandy Bay
Tasmania, 7250
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Gerald P. Dwyer

Clemson University ( email )

Department of Economics
Clemson University
Clemson, SC 29634
United States

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Thomas J Flavin

National University of Ireland, Maynooth (NUI Maynooth) - Department of Economics ( email )

County Kildare
Ireland
+353 1 708 3369 (Phone)
+353 1 708 3934 (Fax)

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