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Systematic and liquidity risk in subprime-mortgage backed securities

journal contribution
posted on 2023-05-17, 16:55 authored by Dungey, M, Dwyer, GP, Flavin, T
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.

History

Publication title

Open Economies Review

Volume

24

Pagination

5-32

ISSN

0923-7992

Department/School

TSBE

Publisher

Kluwer Academic Publ

Place of publication

Van Godewijckstraat 30, Dordrecht, Netherlands, 3311 Gz

Rights statement

Copyright 2012 Springer Science+Business Media

Repository Status

  • Restricted

Socio-economic Objectives

Monetary policy

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