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Systematic and Liquidity Risk in Subprime-Mortgage Backed Securities

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Dungey, M, Dwyer, GP and Flavin, T 2011 , Systematic and Liquidity Risk in Subprime-Mortgage Backed Securities.

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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 on the common factor of the �financial crisis.

Item Type: Report (Discussion Paper)
Authors/Creators:Dungey, M and Dwyer, GP and Flavin, T
Keywords: asset backed securities, subprime mortgages, �financial crisis, factor models, Kalman filter, RePec
Publisher: School of Economics and Finance, University of Tasmania
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