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Loss severities on residential real estate debt during the Great Recession |
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| Institution: | 1. School of Business, University of Alberta, Canada;2. Department of Economics, Hitotsubashi University, Japan;1. Department of Economics and Finance, Canisius College, 2001 Main Street, Buffalo, NY 14208, United States;2. School of Accounting and Finance, Faculty of Business, Hong Kong Polytechnic University, Hunghom, Kowloon, Hong Kong;1. University of Bayreuth, Department of Law and Economics, Chair of International Economics and Finance, 95440 Bayreuth, Germany;2. University of Trier, Chair of Monetary Economics, 54286 Trier, Germany;1. Faculty of Economics and Business, University of Groningen, The Netherlands;2. Division of Economics, University of Stirling, United Kingdom |
| Abstract: | This study develops estimates of expected loss severities on mortgage exposures using data from Florida during the Great Recession. This paper marks the first attempt at addressing sample selectivity in the context of loss models. We also construct measures of home equity that are more accurate than those employed in previous studies. We find that failing to address sample selection and the use of noisy equity measures in loss models can bias loss estimates significantly. We also find significantly higher loss severities and a greater sensitivity of loss severity to equity than what previous studies report. |
| Keywords: | LGD Loss severity Credit risk Capital model Mortgages Home equity Sample selection |
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