The subprime credit crisis and contagion in financial markets
Francis Longstaff
Journal of Financial Economics, 2010, vol. 97, issue 3, 436-450
Abstract:
I conduct an empirical investigation into the pricing of subprime asset-backed collateralized debt obligations (CDOs) and their contagion effects on other markets. Using data for the ABX subprime indexes, I find strong evidence of contagion in the financial markets. The results support the hypothesis that financial contagion was propagated primarily through liquidity and risk-premium channels, rather than through a correlated-information channel. Surprisingly, ABX index returns forecast stock returns and Treasury and corporate bond yield changes by as much as three weeks ahead during the subprime crisis. This challenges the popular view that the market prices of these "toxic assets" were unreliable; the results suggest that significant price discovery did in fact occur in the subprime market during the crisis.
Keywords: Contagion; Asset-backed; securities; Subprime; CDOs; Liquidity; Toxic; assets (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (273)
Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304-405X(10)00012-7
Full text for ScienceDirect subscribers only
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:97:y:2010:i:3:p:436-450
Access Statistics for this article
Journal of Financial Economics is currently edited by G. William Schwert
More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().