RESPONSES OF SUBPRIME RESIDENTIAL MORTGAGE LOAN AND MORTGAGE-BACKED SECURITIES PRICES TO FINANCIAL SHOCKS

摘要

This paper addresses the impact of speculative mortgagernfunding on the pricing of residential mortgage loans andrntheir securitization into residential mortgage-backed securitiesrnin a subprime context. In this regard, we make usernof techniques involving multivariate vector autoregressivernmodels and generalized impulse response functions in orderrnto study the shocks related to this type of funding.rnIn particular, the vector autoregressive model utilized inrnthis paper estimates individual regressions within a systemrnwhere all economic variables are endogenously determined.rnFurthermore, the aforementioned response functionsrnprovide a means of determining the impact of shocksrnwithin a given horizon. For mortgage loans, these shocksrnprimarily involve interest rates, mortgagor risk characteristicsrnand loan terms while for mortgage-backed securitiesrnthe shock mainly emanates from the prepayment rate.rnOur findings indicate that speculativemortgage funding hasrndriven up the prices of subprime residential mortgage loansrnand residential mortgage-backed securities. In addition,rnsuch funding contributes to increased volatility in relatedrnmortgage markets.