Liquidity Provision, Credit Risk and the Bond Spread: New Evidence from the Subprime Mortgage Market

55 Pages Posted: 29 Oct 2015

See all articles by Xudong An

Xudong An

San Diego State University

Timothy J. Riddiough

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics

Date Written: October 28, 2015

Abstract

We study the determinants of the subprime mortgage loan spread, with a particular focus on funding liquidity and default-liquidity interaction effects. We find that sector-level as well as macro funding liquidity provision affected subprime loan rates, explaining a significant portion of the variation in spreads. Liquidity conditions just prior to loan default mattered, indicating destabilizing liquidity-driven default effects. A reduction in macro funding liquidity provision at the time of loan origination predicts worsening credit performance, implying a stabilizing default-driven liquidity component in the loan spread. Positive default-liquidity feedback (spiraling) effects are also documented.

Keywords: Bond Pricing, Liquidity, Credit Risk, Subprime Mortgage, Securitization

JEL Classification: E32, E44, E51, G12, G32, L85

Suggested Citation

An, Xudong and Riddiough, Timothy J., Liquidity Provision, Credit Risk and the Bond Spread: New Evidence from the Subprime Mortgage Market (October 28, 2015). Available at SSRN: https://ssrn.com/abstract=2682628 or http://dx.doi.org/10.2139/ssrn.2682628

Xudong An

San Diego State University ( email )

San Diego, CA 92182-0763
United States

Timothy J. Riddiough (Contact Author)

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-262-3531 (Phone)
608-265-2738 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
65
Abstract Views
579
rank
349,821
PlumX Metrics