The Subprime Virus |
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| Authors: | Sumit Agarwal Brent W. Ambrose Yildiray Yildirim |
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| Affiliation: | 1. Departments of Finance and Real Estate, National University of Singapore, Singapore;2. Institute for Real Estate Studies, The Pennsylvania State University;3. William Newman Department of Real Estate, Baruch College, NY |
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| Abstract: | We examine the correlation between prime mortgage default risk and the introduction of subprime mortgages in a local area. We motivate our analysis with a model of a default contagion effect that spreads the effect of a mortgage foreclosure from one property to surrounding properties. Through numerical analysis, we demonstrate the effect of subprime mortgage originations to the risk of prime mortgages. Finally, we offer empirical support for our model by examining the spatial variation in MSA prime mortgage default rates and the level of subprime mortgage activity. |
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