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Working Paper
Testing for contagion using correlations: some words of caution
Tests for contagion in financial returns using correlation analysis are seriously affected by the size of the noncrisis and crisis periods. Typically the crisis period contains relatively few observations, which seriously affects the power of the test.
Working Paper
Trend-cycle decomposition: implications from an exact structural identification
A well-documented property of the Beveridge-Nelson trend-cycle decomposition is the perfect negative correlation between trend and cycle innovations. We show how this may be consistent with a structural model where trend shocks enter the cycle, or cyclic shocks enter the trend and that identification restrictions are necessary to make this structural distinction. A reduced-form unrestricted version such as that of Morley, Nelson and Zivot (2003) is compatible with either option, but cannot distinguish which is relevant. We discuss economic interpretations and implications using US real GDP ...
Conference Paper
Vintage and credit rating: what matters in the ABX data during the credit crunch?
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 ...
Working Paper
Systematic and liquidity risk in subprime-mortgage backed securities
The misevaluation of risk in securitized financial products is central to understanding the financial crisis of 2007?8. This paper characterizes the evolution of factors affecting collateralized debt obligations based on subprime mortgages. A key feature of subprime-mortgage backed indices is that they are distinct in their vintage of issuance. Using a latent factor framework that incorporates this vintage effect, we show the increasing importance of a common factor on more senior tranches during the crisis. We examine this common factor and its relationship with spreads. We estimate the ...
Working Paper
Factor analysis of a model of stock market returns using simulation-based estimation techniques
A dynamic latent factor model of stock market returns is estimated using simulation-based techniques. Stock market volatility is decomposed into common and idiosyncratic components, and volatility decompositions are compared between stable and turmoil periods to test for possible shift-contagion in equity markets during Asian financial crisis. Five core Asian emerging stock markets are analyzedThailand, Indonesia, Korea, Malaysia and the Philippines. Results identify the existence of shift-contagion during the crisis and indicate that the Thai market was a trigger for contagious shock ...