Systematic and Liquidity Risk in Subprime-Mortgage Backed Securities

Mardi Dungey; Gerald P Dwyer; Thomas Flavin

doi:10.1007/s11079-012-9254-4

Systematic and Liquidity Risk in Subprime-Mortgage Backed Securities

Mardi Dungey, Gerald P Dwyer, Thomas Flavin

Research output: Contribution to journal › Article

Abstract

The misevaluation of risk in securitized financial products is central to understanding the Financial Crisis of 2007-2008. This paper characterizes the evolution of factors affecting 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 effect, 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 effects of the financial crisis on the common factor.

Original language	English
Pages (from-to)	5-32
Journal	Open Economies Review
Volume	24
Issue number	1
DOIs	https://doi.org/10.1007/s11079-012-9254-4
Publication status	Published - 2013

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10.1007/s11079-012-9254-4

http://hdl.handle.net/1885/70495

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title = "Systematic and Liquidity Risk in Subprime-Mortgage Backed Securities",

abstract = "The misevaluation of risk in securitized financial products is central to understanding the Financial Crisis of 2007-2008. This paper characterizes the evolution of factors affecting 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 effect, 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 effects of the financial crisis on the common factor.",

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Systematic and Liquidity Risk in Subprime-Mortgage Backed Securities

Abstract

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