Speculative funding and its impact on subprime mortgage product pricing

J. Mukuddem-Petersen, M. A. Petersen, T. Bosch and B. De Waal

Applied Financial Economics, 2011, vol. 21, issue 19, 1397-1408

Abstract: We address the impact of speculative mortgage funding on the pricing of subprime residential mortgage loans (measured by risk premia) and securities backed by these mortgages (measured by ABX.HE indices). In this regard, we make use of techniques involving multivariate Vector Autoregressive (VAR) models and Generalized Impulse Response Functions (GIRFs) in order to study the shocks related to this type of funding. More specifically, the VAR model utilized in this article estimates individual regressions within a system where all mortgage variables are endogenously determined. Furthermore, the aforementioned response functions provide a means of determining the impact of shocks within a given horizon. Our main conclusions are that mortgage price is most significantly affected by shocks from mortgage rates, while, for ABX price, shocks to speculative mortgage funding, ABX price, mortgagor risk characteristics and prepayment rate elicit significant responses. In addition, our findings indicate that speculative mortgage funding has driven up mortgage and ABX price and contributes to increased volatility in related markets.

Keywords: subprime mortgage crisis; residential mortgage loans; mortgage securitization; ABX.HE indices; vector autoregressive model; generalized impulse response function (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1080/09603107.2011.572850

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