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Subprime Mortgage Defaults and Credit Default Swaps
Author(s) -
ARENTSEN ERIC,
MAUER DAVID C.,
ROSENLUND BRIAN,
ZHANG HAROLD H.,
ZHAO FENG
Publication year - 2015
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12221
Subject(s) - default , credit default swap , synthetic cdo , itraxx , shared appreciation mortgage , business , swap (finance) , financial system , mortgage insurance , finance , credit risk , credit reference , credit valuation adjustment , casualty insurance , insurance policy
We offer the first empirical evidence on the adverse effect of credit default swap (CDS) coverage on subprime mortgage defaults. Using a large database of privately securitized mortgages, we find that higher defaults concentrate in mortgage pools with concurrent CDS coverage, and within these pools the loans originated after or shortly before the start of CDS coverage have an even higher delinquency rate. The results are robust across zip code and origination quarter cohorts. Overall, we show that CDS coverage helped drive higher mortgage defaults during the financial crisis.