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The supreme subprime myth: the role of bad loans in the 2007-2009 financial crisis

Author

Listed:
  • Alberto Niccoli

    (Università Politecnica delle Marche and Mo.Fi.R, Ancona)

  • Francesco Marchionne

    (Università Politecnica delle Marche and Mo.Fi.R, Ancona)

Abstract

Using simulations, we show that the probability of default and losses given default of subprime mortgage loans are small in comparison to their interest rates. The implication is that these loans are profitable for risk neutral efficient banks. As subprime mortgages remain a good investment even for higher values of probability of default and losses given default, our conclusion is that they did not trigger the 2007-2009 financial crisis. In contrast with other papers, this finding does not derive from analyses relating to the subprime market size, but from the positive ex-ante net present value of their discounted cash flows.

Suggested Citation

  • Alberto Niccoli & Francesco Marchionne, 2012. "The supreme subprime myth: the role of bad loans in the 2007-2009 financial crisis," PSL Quarterly Review, Economia civile, vol. 65(260), pages 52-77.
    • Handle: RePEc:psl:pslqrr:2012:13
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    File URL: http://ojs.uniroma1.it/index.php/PSLQuarterlyReview/article/view/9938/9821
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    Citations

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    Cited by:

    1. Boya Wang, 2016. "Ownership, Institutions & Firm Value: Cross-Provincial Evidence from China," Working Papers wp484, Centre for Business Research, University of Cambridge.
    2. Wang, Boya, 2018. "Ownership, institutions and firm value: Cross-provincial evidence from China," Research in International Business and Finance, Elsevier, vol. 44(C), pages 547-565.

    More about this item

    Keywords

    subprime mortgages; interest rates; probability of default; loss given default;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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