Publication Type
Working Paper
Version
publishedVersion
Publication Date
3-2006
Abstract
In this paper, we develop a specific observable symptom of a banking system that underprices the default spread in non-recourse asset-backed lending. Using three different data sets for 18 countries and property types, we find that, following a negative demand shock, the “underpricing” economies experience far deeper asset market crashes than economies in which the put option is correctly priced. Furthermore, only one of the countries in our sample continues to exhibit the underpricing symptom following a market crash. This indicates that market crashes have a cleansing effect and eliminate underpricing at least for a period of time. This makes investing in such markets safer following a negative demand shock.
Keywords
real estate bubble, lender optimism, disaster myopia, Asian financial crisis
Discipline
Economics | Finance
Research Areas
Applied Microeconomics; Macroeconomics
First Page
1
Last Page
32
Publisher
SMU Economics and Statistics Working Paper Series, No. 12-2006
City or Country
Singapore
Citation
KOH, Winston T. H.; MARIANO, Roberto S. S.; PAVLOV, Andrey; PHANG, Sock Yong; TAN, Augustine H. H.; and WACHTER, Susan M..
Underpriced Default Spread Exacerbates Market Crashes. (2006). 1-32.
Available at: https://ink.library.smu.edu.sg/soe_research/1898
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.