Flavin, Thomas and Sheenan, Lisa (2015) The role of U.S. subprime mortgage-backed assets in propagating the crisis: Contagion or interdependence? North American Journal of Economics and Finance, 34. pp. 167-186. ISSN 1062-9408

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Abstract

tThough relatively small, the subprime mortgage-backed securitiesmarket is often identified as the source of the crisis that sweptthrough the U.S. financial system from 2007 onwards. We investi-gate if its role in the propagation of the crisis was due to contagionor interdependence. Using a Markov-switching VAR with time-varying transition probabilities, we analyse the transmission ofshocks across the financial system. We find little evidence of assetcorrelation changes between normal and crisis regimes and thosethat do occur are predominantly associated with liquidity vari-ables. Otherwise, relationships are stable across market conditions,implying that the U.S. financial crisis was due to cross-marketinterdependencies rather than contagion. There is limited evidencethat the deteriorating quality of the underlying assets can explainthe transition from ‘normal’ market conditions to a high-volatilityregime, although this is not consistent across model specifications.

Item Type:	Article
Keywords:	Financial crisis; Contagion Subprime; mortgage-backed securities; Markov-switching VAR;
Academic Unit:	Faculty of Social Sciences > Economics, Finance and Accounting
Item ID:	8013
Identification Number:	https://doi.org/10.1016/j.najef.2015.09.001
Depositing User:	Thomas Flavin
Date Deposited:	08 Mar 2017 15:51
Journal or Publication Title:	North American Journal of Economics and Finance
Publisher:	Elsevier
Refereed:	Yes
URI:	Publisher
Use Licence:	This item is available under a Creative Commons Attribution Non Commercial Share Alike Licence (CC BY-NC-SA). Details of this licence are available here

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