The Supreme Subprime Myth: The Role of Bad Loans in the 2007-2009 Financial Crisis

PSL Quarterly Review, Vol. 65 No. 260, pp. 53-77, 2012

25 Pages Posted: 23 Oct 2014

See all articles by Alberto Niccoli

Alberto Niccoli

Università Politecnica delle Marche and MoFiR

Francesco Marchionne

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy; Università Politecnica delle Marche - Department of Economics

Date Written: January 15, 2012

Abstract

Using simulations, we show that the probability of default and losses given default of subprime mortgage loans are small in comparison to their interest rates. The implication is that these loans are profitable for risk neutral efficient banks. As subprime mortgages remain a good investment even for higher values of probability of default and losses given default, our conclusion is that they did not trigger the 2007-2009 financial crisis. In contrast with other papers, this finding does not derive from analyses relating to the subprime market size, but from the positive ex-ante net present value of their discounted cash flows.

Keywords: subprime mortgages, interest rates, probability of default, loss given default

JEL Classification: G01, G11, G21, G32

Suggested Citation

Niccoli, Alberto and Marchionne, Francesco, The Supreme Subprime Myth: The Role of Bad Loans in the 2007-2009 Financial Crisis (January 15, 2012). PSL Quarterly Review, Vol. 65 No. 260, pp. 53-77, 2012. Available at SSRN: https://ssrn.com/abstract=2513790

Alberto Niccoli (Contact Author)

Università Politecnica delle Marche and MoFiR ( email )

Piazzale Martelli, 8
60121 Ancona
Italy

Francesco Marchionne

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

1309 East Tenth Street
Bloomington, IN 47405-1701
United States
01 812 855-3756 (Phone)

HOME PAGE: http://kelley.iu.edu/BEPP/Faculty/page14113.cfm?ID=47081

Università Politecnica delle Marche - Department of Economics ( email )

Piazzale Martelli, 8
Ancona, 60121
Italy
+39 071 2207120 (Phone)

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