Jump and Cojump Risk in Subprime Home Equity Derivatives

Bruce Mizrach
2011 Social Science Research Network  
I analyze the jump risk in the ABX index of subprime home equity credit default swaps and CME housing futures. Using estimators of the jump and cojump components of security prices, I document: (1) signi...cant jumps in the ABX as early as September 2006, well before any problems in the mortgage market were discussed in the press or policy circles; (2) news explains up to 56% of the jump risk; (3) the return variation due to jumps in the housing futures is above 40%, almost two times larger
more » ... wo times larger than the ABX; (4) 27 signi...cant cojump episodes between the ABX and housing futures; (5) a predictive model that explains up to 85% of the jump risk; (6) a 20 point slope in the housing futures curve leads to an expected jump of 1:4% in the BBB-ABX; (7) jumps explain up to 50% of the value-at-risk exceedences which occur at almost three times the expected rate.
doi:10.2139/ssrn.1089274 fatcat:thrc2vx2lzciledmw6hfee2i2e