Revisiting Subprime Pricing Irrationality During the Global Financial Crisis

Walter Jansson ()
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Walter Jansson: YPFS, Yale School of Management, https://elischolar.library.yale.edu/journal-of-financial-crises/
Authors registered in the RePEc Author Service: Rasheed Saleuddin

Journal of Financial Crises, 2021, vol. 3, issue 2, 1-40

Abstract: During the depths of the global financial crisis of 2008-09, many holders of subprime mortgage securitizations and related derivatives were forced to mark their investments to fair values based on observable prices in mortgage index credit default swap markets. Research has generally claimed that crisis pricing of such indices cannot be explained by fundamental analysis of the underlying markets, while marking portfolios to such "irrational" benchmarks may have contributed to severe distress in the financial sector. This paper econometrically demonstrates significant fundamentally-driven components in subprime mortgage index returns throughout the crisis. Our findings suggest that such benchmarks must be considered reasonable, though imperfect, guides for determining fair value.

Keywords: financial crisis; irrational markets; mortgage-backed securities; fair value accounting; mark to market (search for similar items in EconPapers)
JEL-codes: G01 G28 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:ysm:ypfsfc:3211

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