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Vintage and credit rating: what matters in the ABX data during the credit crunch?

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  • Mardi Dungey
  • Gerald P. Dwyer
  • Thomas Flavin

Abstract

The mortgage backed securities market has dramatically declined during the credit crunch of 2007-2008. To understand the factors driving its demise we utilise a latent factor model representing common effects, asset rating effects, vintage of issuance effects and liquidity effects - extending the recent representation of CDO pricing in Longstaff and Rajan (2008). Common and liquidity effects are shown to have an increasing influence on the performance of the ABX-HE indices, with the role of vintage factors changing dramatically over the sample period of January 2006 to May 2008. Consistent with other evidence, risk from systemic factors has transferred risk to more highly rated tranches of these structured finance products.

Suggested Citation

  • Mardi Dungey & Gerald P. Dwyer & Thomas Flavin, 2009. "Vintage and credit rating: what matters in the ABX data during the credit crunch?," Proceedings, Federal Reserve Bank of San Francisco, issue Jan.
    • Handle: RePEc:fip:fedfpr:y:2009:i:jan:x:13
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    References listed on IDEAS

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    1. Markus K. Brunnermeier, 2008. "Deciphering the Liquidity and Credit Crunch 2007-08," NBER Working Papers 14612, National Bureau of Economic Research, Inc.
    2. Benmelech, Efraim & Dlugosz, Jennifer, 2009. "The alchemy of CDO credit ratings," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 617-634, July.
    3. Mardi Dungey & Vance L Martin & Adrian R Pagan, 2000. "A multivariate latent factor decomposition of international bond yield spreads," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(6), pages 697-715.
    4. Peter M. DeMarzo, 2005. "The Pooling and Tranching of Securities: A Model of Informed Intermediation," The Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 1-35.
    5. Francis A. Longstaff & Arvind Rajan, 2008. "An Empirical Analysis of the Pricing of Collateralized Debt Obligations," Journal of Finance, American Finance Association, vol. 63(2), pages 529-563, April.
    6. Roberto Blanco & Simon Brennan & Ian W. Marsh, 2005. "An Empirical Analysis of the Dynamic Relation between Investment‐Grade Bonds and Credit Default Swaps," Journal of Finance, American Finance Association, vol. 60(5), pages 2255-2281, October.
    7. Vance L. Martin & Mardi Dungey, 2007. "Unravelling financial market linkages during crises," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(1), pages 89-119.
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    Cited by:

    1. Balla, Eliana & Carpenter, Robert E. & Robinson, Breck L., 2011. "Assessing the effectiveness of the Paulson "teaser freezer" Plan: Evidence from the ABX index," Journal of Economics and Business, Elsevier, vol. 63(5), pages 392-411, September.
    2. Dwyer, Gerald P. & Tkac, Paula, 2009. "The financial crisis of 2008 in fixed-income markets," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1293-1316, December.

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    Keywords

    Mortgage loans;

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