Detecting and Explaining Systemic Risks of US Mortgage Banks - Evidence from the Subprime Crisis

27 Pages Posted: 22 Mar 2010

See all articles by Gregor N. F. Weiss

Gregor N. F. Weiss

University of Leipzig - Faculty of Economics and Management Science

Stephan Paul

Ruhr University of Bochum - Faculty of Economics

Date Written: March 16, 2010

Abstract

In recent history, financial markets worldwide experienced severe turmoil due to the subprime crisis originating from the practice of US mortgage banks to securitise loans given especially to subprime borrowers. In the same crisis, several distressed banks were bailed out by states with even more banks receiving financial aids from governments. Using a unique data sample of 100 announcements of US mortgage banks between 2006 and 2009, this paper provides em-pirical evidence that isolated failures of US mortgage banks caused significant contagion effects in the US financial system. Conversely, especially the bailouts of Fannie Mae and Freddie Mac led to significant positive valuation effects at rival banks. In the cross-sectional analyses, contrary to previous studies in the literature on past financial crises, we find evi-dence for pure contagion effects following mortgage bank failures and rational valuation effects following bailouts. These results indicate that several of the failures of US mortgage banks during the subprime crisis caused irrational contagion in the US financial system thus justifying government intervention.

Keywords: Contagion, subprime crisis, bailout, mortgage bank

JEL Classification: G01, G21, G28

Suggested Citation

Weiss, Gregor N. F. and Paul, Stephan, Detecting and Explaining Systemic Risks of US Mortgage Banks - Evidence from the Subprime Crisis (March 16, 2010). Available at SSRN: https://ssrn.com/abstract=1572320 or http://dx.doi.org/10.2139/ssrn.1572320

Gregor N. F. Weiss (Contact Author)

University of Leipzig - Faculty of Economics and Management Science ( email )

Grimmaische Str. 12
Leipzig, 04109
Germany
+49 341 97 33821 (Phone)
+49 341 97 33829 (Fax)

HOME PAGE: http://www.wifa.uni-leipzig.de/nfdl

Stephan Paul

Ruhr University of Bochum - Faculty of Economics ( email )

Ruhr University of Bochum
Faculty of Economics
Bochum, DE 44780
Germany

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