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The bear's lair index credit default swaps and the subprime mortgage crisis

During the recent financial crisis, ABX.HE index credit default swaps (CDS) on baskets of mortgage-backed securities were a benchmark widely used by financial institutions to mark their subprime mortgage portfolios to market. However, we find that prices for the AAA ABX.HE index CDS during the crisi... Full description

Journal Title: The review of financial studies 2011, Vol.24(10), pp. 3250-3280
Main Author: Stanton, Richard
Format: Electronic Article Electronic Article
Language: English
Subjects:
Usa
ID: ISSN: 0893-9454
Link: http://gso.gbv.de/DB=2.1/PPNSET?PPN=672220741
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recordid: gbv672220741
title: The bear's lair index credit default swaps and the subprime mortgage crisis
format: Article
creator:
  • Stanton, Richard
subjects:
  • Kreditderivat
  • Subprime-Krise
  • Hypothek
  • Asset-Backed Securities
  • Usa
  • 2006-2010
ispartof: The review of financial studies, 2011, Vol.24(10), pp. 3250-3280
description: During the recent financial crisis, ABX.HE index credit default swaps (CDS) on baskets of mortgage-backed securities were a benchmark widely used by financial institutions to mark their subprime mortgage portfolios to market. However, we find that prices for the AAA ABX.HE index CDS during the crisis were inconsistent with any reasonable assumption for mortgage default rates, and that these price changes are only weakly correlated with observed changes in the credit performance of the underlying loans in the index, casting serious doubt on the suitability of these CDS as valuation benchmarks. We also find that the AAA ABX.HE index CDS price changes are related to short-sale activity for publicly traded investment banks with significant mortgage market exposure. This suggests that capital constraints, limiting the supply of mortgage-bond insurance, may be playing a role here similar to that identified by Froot (2001) in the market for catastrophe insurance. Reprinted by permission of Oxford University Press
language: eng
source:
identifier: ISSN: 0893-9454
fulltext: fulltext
issn:
  • 08939454
  • 0893-9454
url: Link


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descriptionDuring the recent financial crisis, ABX.HE index credit default swaps (CDS) on baskets of mortgage-backed securities were a benchmark widely used by financial institutions to mark their subprime mortgage portfolios to market. However, we find that prices for the AAA ABX.HE index CDS during the crisis were inconsistent with any reasonable assumption for mortgage default rates, and that these price changes are only weakly correlated with observed changes in the credit performance of the underlying loans in the index, casting serious doubt on the suitability of these CDS as valuation benchmarks. We also find that the AAA ABX.HE index CDS price changes are related to short-sale activity for publicly traded investment banks with significant mortgage market exposure. This suggests that capital constraints, limiting the supply of mortgage-bond insurance, may be playing a role here similar to that identified by Froot (2001) in the market for catastrophe insurance. Reprinted by permission of Oxford University Press
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