Dating the timeline of financial bubbles during the subprime crisis

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Bubble implosion may take several different forms depending on the nature of the collapse and therefore requires some flexibility in modeling.

This paper first strengthens the theoretical foundation of the real time bubble monitoring strategy proposed in Phillips, Shi and Yu (2015a,b, PSY) by developing analytics and studying the performance characteristics of the testing algorithm under alternative forms of bubble implosion which capture various return paths to market normalcy.

SES 12-58258 and the Kelly Foundation from the University of Auckland.

Investors purchasing PMBS profited at first because rising house prices protected them from losses.Unless protected by government insurance, lenders often denied such mortgage requests.While some high-risk families could obtain small-sized mortgages backed by the Federal Housing Administration (FHA), others, facing limited credit options, rented.New financial products were used to apportion these risks, with private-label mortgage-backed securities (PMBS) providing most of the funding of subprime mortgages.The less vulnerable of these securities were viewed as having low risk either because they were insured with new financial instruments or because other securities would first absorb any losses on the underlying mortgages (Di Martino and Duca 2007).

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