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2008): “Jump and Cojump Risk in Subprime Home Equity Derivatives”, Working Paper

By Bruce Mizrach


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 larger than the ABX; (4) 25 signi…cant cojump episodes between the AAA ABX and the 12-month 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

Topics: asset backed credit default swaps, housing futures, subprime, jump risk, cojumps, JEL Classification, G13, G32, E44
Year: 2013
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