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This paper analyzes contagion from the U.S. subprime mortgage-backed securities market, represented by the ABX.HE indices, to several fixed income, equity and volatility markets in line with seminal literature on the subject. We analyze ‘spliced’ data set constructed in line with the literature, along with two traded ABX.HE indexes. A VAR framework is employed, firstly to extend existing analysis to include 2009, and then to analyze two traded indexes. In order to test the sensitivity of these results ABX returns are then included as an eighth endogenous variable in the VAR. Principal component analysis is employed to reduce the dimensionality of the data. The main principal component obtained is then included as an exogenous variable in the VAR framework and the sensitivity of these results is tested by including this principal component as an eighth endogenous variable. The results indicate evidence of contagion from the ABX indexes during the crisis of 2007-2009 but the source and intensity of this contagion varies across indexes. This highlights the differences across the three ABX data sets analyzed and suggests that splicing the ABX index may impact the results obtained. It also provides evidence that the traded ABX indexes are heterogeneous assets with varying sensitivities to risk factors during the crisis.

ANALYZING CONTAGION FROM THE U.S. SUBPRIME MORTGAGE-BACKED SECURITIES MARKET