Flavin, Thomas and Sheenan, Lisa (2015) The role of U.S. subprime mortgage-backed assets in propagating the crisis: contagion or interdependence? Working Paper. Department of Economics, Finance & Accounting, Maynooth University. (Unpublished)

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Abstract

Though relatively small, the subprime mortgage-backed securities market is often identified as the source of the crisis that swept through the U.S. financial system from 2007 onwards. We investigate if its role in the propagation of the crisis was due to contagion or interdependence. Using a Markov-switching VAR with time-varying transition probabilities, we analyze the transmission of shocks across the financial system. We find little evidence of asset correlation changes between normal and crisis regimes and those that do occur are predominantly associated with liquidity variables. Otherwise, relationships are stable across market conditions, implying that the U.S. financial crisis was due to cross-market interdependencies rather than contagion. There is limited evidence that the deteriorating quality of the underlying assets can explain the transition from 'normal' market conditions to a high-volatility regime although his is not consistent across model specifications.

Item Type:	Monograph (Working Paper)
Additional Information:	Working Paper N260-15
Keywords:	Financial Crisis; Contagion; Subprime mortgage-backed securities; Markov-switching; VAR;
Academic Unit:	Faculty of Social Sciences > Economics, Finance and Accounting
Item ID:	6229
Depositing User:	Thomas Flavin
Date Deposited:	02 Jul 2015 15:13
Publisher:	Department of Economics, Finance & Accounting, Maynooth University
URI:
Use Licence:	This item is available under a Creative Commons Attribution Non Commercial Share Alike Licence (CC BY-NC-SA). Details of this licence are available here

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