Revisiting Subprime Pricing Irrationality During the Global Financial Crisis

Authors

Rasheed Saleuddin, University of CambridgeFollow
Walter Jansson, University of CambridgeFollow

Document Type

Article

JEL Codes

G01, G28

Abstract

During the depths of the global financial crisis of 2008-09, many holders of subprime mortgage securitizations and related derivatives were forced to mark their investments to fair values based on observable prices in mortgage index credit default swap markets. Research has generally claimed that crisis pricing of such indices cannot be explained by fundamental analysis of the underlying markets, while marking portfolios to such “irrational” benchmarks may have contributed to severe distress in the financial sector. This paper econometrically demonstrates significant fundamentally-driven components in subprime mortgage index returns throughout the crisis. Our findings suggest that such benchmarks must be considered reasonable, though imperfect, guides for determining fair value.

Recommended Citation

Saleuddin, Rasheed and Jansson, Walter (2021) "Revisiting Subprime Pricing Irrationality During the Global Financial Crisis," Journal of Financial Crises: Vol. 3 : Iss. 2, 1-40.
Available at: https://elischolar.library.yale.edu/journal-of-financial-crises/vol3/iss2/1

Date Revised

2021-06-30