The Subprime Virus

25 Pages Posted: 26 Oct 2015

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Brent W. Ambrose

Pennsylvania State University

Yildiray Yildirim

Zicklin School of Business, Baruch College - The City University of New York

Date Written: Winter 2015

Abstract

We examine the correlation between prime mortgage default risk and the introduction of subprime mortgages in a local area. We motivate our analysis with a model of a default contagion effect that spreads the effect of a mortgage foreclosure from one property to surrounding properties. Through numerical analysis, we demonstrate the effect of subprime mortgage originations to the risk of prime mortgages. Finally, we offer empirical support for our model by examining the spatial variation in MSA prime mortgage default rates and the level of subprime mortgage activity.

Suggested Citation

Agarwal, Sumit and Ambrose, Brent W. and Yildirim, Yildiray, The Subprime Virus (Winter 2015). Real Estate Economics, Vol. 43, Issue 4, pp. 891-915, 2015. Available at SSRN: https://ssrn.com/abstract=2679171 or http://dx.doi.org/10.1111/1540-6229.12108

Sumit Agarwal (Contact Author)

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Brent W. Ambrose

Pennsylvania State University ( email )

University Park, PA 16802-3306
United States
814-867-0066 (Phone)
814-865-6284 (Fax)

Yildiray Yildirim

Zicklin School of Business, Baruch College - The City University of New York ( email )

55 Lexington Ave., Box B13-260
New York, NY 10010
United States

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