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Systematic and Liquidity Risk in Subprime-Mortgage Backed Securities
Flavin, Thomas; Dwyer, Patrick; Dungey, Mardi
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.
Keyword(s): Economics, Finance & Accounting; asset backed securities; subprime mortgages; …nancial crisis; factor mod- els; Kalman …lter
Publication Date:
2011
Type: Report
Peer-Reviewed: No
Institution: Maynooth University
Citation(s): Flavin, Thomas and Dwyer, Patrick and Dungey, Mardi (2011) Systematic and Liquidity Risk in Subprime-Mortgage Backed Securities. Working Paper. NUI Maynooth. (Unpublished)
Publisher(s): NUI Maynooth
File Format(s): application/pdf
Related Link(s): http://eprints.maynoothuniversity.ie/2825/1/N219-11.pdf
First Indexed: 2014-09-20 05:04:31 Last Updated: 2017-04-25 19:38:07