EconPapers    
Economics at your fingertips  
 

Underpriced Default Spread Exacerbates Market Crashes

Winston Koh, Roberto Mariano (), Andrey Pavlov (), Sock-Yong Phang (), Augustine H. H. Tan () and Susan Wachter ()
Additional contact information
Andrey Pavlov: Simon Fraser University
Augustine H. H. Tan: School of Economics and Social Sciences, Singapore Management University

No 12-2006, Working Papers from Singapore Management University, School of Economics

Abstract: 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)
Pages: 32 pages
Date: 2006-03
New Economics Papers: this item is included in nep-ban, nep-fmk and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Published in SMU Economics and Statistics Working Paper Series

Downloads: (external link)
https://mercury.smu.edu.sg/rsrchpubupload/6692/underprice.pdf (application/pdf)

Related works:
Working Paper: Underpriced Default Spread Exacerbates Market Crashes (2006) Downloads
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:siu:wpaper:12-2006

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Papers from Singapore Management University, School of Economics Contact information at EDIRC.
Bibliographic data for series maintained by QL THor ().

 
Page updated 2020-10-21
Handle: RePEc:siu:wpaper:12-2006