Underpriced Default Spread Exacerbates Market Crashes
Roberto Mariano (),
Sock-Yong Phang (),
Augustine H. H. Tan and
Susan Wachter ()
Finance Working Papers from East Asian Bureau of Economic Research
In this paper, we develop a specific observable symptom of a banking system that underprices the default spread in non-recourse asset-backed lending. Using three different data sets for 18 countries and property types, we find that, following a negative demand shock, the underpricing economies experience far deeper asset market crashes than economies in which the put option is correctly priced. Furthermore, only one of the countries in our sample continues to exhibit the underpricing symptom following a market crash. This indicates that market crashes have a cleansing effect and eliminate underpricing at least for a period of time. This makes investing in such markets safer following a negative demand shock.
Keywords: real estate bubble; lender optimism; disaster myopia; Asian financial crisis (search for similar items in EconPapers)
JEL-codes: G01 L85 G21 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed
Downloads: (external link)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.eaber.org/node/22458 [301 Moved Permanently]--> https://www.eaber.org/node/22458 [301 Moved Permanently]--> https://eaber.org/node/22458)
Working Paper: Underpriced Default Spread Exacerbates Market Crashes (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eab:financ:22458
Access Statistics for this paper
More papers in Finance Working Papers from East Asian Bureau of Economic Research Contact information at EDIRC.
Bibliographic data for series maintained by Shiro Armstrong ().