The Risk-Relevance of Securitized Mortgages during the Recent Financial Crisis

Publication Type

Working Paper

Publication Date



We investigate the risk-relevance of securitized subprime, non-conforming and commercial mortgages for sponsor-originators during the recent financial crisis. Using volatility of realized stock returns and option-implied volatility, we observe a pronounced increase in the risk-relevance for subprime securitizations as early as 2006. In other words, equity investors of subprime mortgage securitizers recognized the unfolding subprime risk and its retention by sponsor-originators as early as 2006. Furthermore, reflecting the notion that the financial crisis evolved in waves, we find that equity investors recognized the risk-retention of other non-conforming and commercial mortgage securitizations as the riskiness of the collateral became apparent later on during the crisis. Thus, our results indicate that risk-relevance of securitized assets for sponsor-originators evolved inter-temporally as the characteristics of these securitized assets changed over time. Additional analyses show that the risk-relevance results vary cross-sectionally with issue and firm characteristics such as monoline credit-enhancement, existence of special servicers or B-piece buyers, SEC registration status, and underwriter reputation. Our results potentially inform the current debates on the opacity of securitization structures, and the risk-retention requirements outlined in the recently enacted Dodd-Frank Wall Street Reform Bill. In particular, our study highlights that the evaluation of risk-relevance of securitization entities should take into account heterogeneity in collateral and structure characteristics, both cross-sectionally and inter-temporally.


Accounting | Real Estate

Research Areas

Financial Performance Analysis