Systematic and Liquidity Risk in Subprime-Mortgage Backed Securities

Flavin, Thomas and Dwyer, Patrick and Dungey, Mardi (2011) Systematic and Liquidity Risk in Subprime-Mortgage Backed Securities. Working Paper. NUI Maynooth. (Unpublished)

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Abstract The misevaluation of risk in securitized …nancial products is central to understand- ing the Financial Crisis of 2007-2008. This paper characterizes the evolution of factors a¤ecting 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 e¤ect, 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 e¤ects on the common factor of the …nancial crisis.

Item Type: Monograph (Working Paper)
Keywords: asset backed securities; subprime mortgages; …nancial crisis; factor mod- els; Kalman …lter;
Academic Unit: Faculty of Social Sciences > Economics, Finance and Accounting
Item ID: 2825
Depositing User: Thomas Flavin
Date Deposited: 15 Nov 2011 11:46
Publisher: NUI Maynooth

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