Subprime Mortgage Defaults and Credit Default Swaps

53 Pages Posted: 24 May 2010 Last revised: 8 May 2014

See all articles by Eric Arentsen

Eric Arentsen

The TCW Group, Inc.

David C. Mauer

University of North Carolina (UNC) at Charlotte

Brian Rosenlund

The TCW Group, Inc.

Harold H. Zhang

University of Texas at Dallas - Naveen Jindal School of Management; China Academy of Financial Research (CAFR)

Feng Zhao

University of Texas at Dallas - Jindal School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: May 7, 2014

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 different zip code and origination quarter cohorts. Overall, we show that CDS coverage helped drive higher mortgage defaults during the financial crisis.

Keywords: Subprime mortgage default, Credit default swaps, Securitization

JEL Classification: G22, G30, G32, G38

Suggested Citation

Arentsen, Eric and Mauer, David C. and Rosenlund, Brian and Zhang, Harold Huibing and Zhao, Feng, Subprime Mortgage Defaults and Credit Default Swaps (May 7, 2014). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1615123 or http://dx.doi.org/10.2139/ssrn.1615123

Eric Arentsen

The TCW Group, Inc. ( email )

Los Angeles, CA
United States

David C. Mauer (Contact Author)

University of North Carolina (UNC) at Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States
704-687-7707 (Phone)

Brian Rosenlund

The TCW Group, Inc. ( email )

865 South Figueroa Street
Los Angeles, CA 90017
United States

Harold Huibing Zhang

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

Feng Zhao

University of Texas at Dallas - Jindal School of Management ( email )

800 W. Campbell Rd. SM 31
Richardson, TX 75080
United States
972-883-5815 (Phone)

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