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Journal of Finance Vol. 70 No. 2 2015

Subprime Mortgage Defaults and Credit Default Swaps

ERIC ARENTSEN1; David C. Mauer; BRIAN ROSENLUND1; Harold H. Zhang; Feng Zhao2,3,4,5

1 TCW Group Inc · 2 University of Iowa · 3 Azienda Usl 8 Arezzo · 4 Orano (United States) · 5 University of Hong Kong

Abstract

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.

DOI
10.1111/jofi.12221
Volume
70
Issue
2
Pages
689-731
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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