Underpriced Default Spread Exacerbates Market Crashes

• Main Authors: KOH, Winston T. H., MARIANO, Roberto S. S, PAVLOV, Andrey, PHANG, Sock Yong, TAN, Augustine H. H., WACHTER, Susan M.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2006
• Subjects: real estate bubble; lender optimism; disaster myopia; Asian financial crisis; Economics; Finance
• Online Access: https://ink.library.smu.edu.sg/soe_research/1898; https://ink.library.smu.edu.sg/context/soe_research/article/2897/viewcontent/UnderpricedDefaultSpreadExacerbatesMarketCrashes.pdf
• Institution: Singapore Management University

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 exp...