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Title: The predictive strength of MBS yield spreads during asset bubbles
Authors: Deku, SY
Kara, A
Semeyutin, A
Keywords: securitization;MBS pricing;credit ratings;asset bubbles;machine learning
Issue Date: 29-Apr-2020
Publisher: Springer Nature
Citation: Deku, S.Y., Kara, A. and Semeyutin, A. (2021) 'The predictive strength of MBS yield spreads during asset bubbles', Review of Quantitative Finance and Accounting, 56 (1), pp. 111 - 142. doi: 10.1007/s11156-020-00888-8.
Abstract: Copyright © The Author(s) 2020. We examine whether the predictive power of initial yield spreads of mortgage-backed securities (MBS) vary with the financial cycle. Using a cross-country sample of 4203 MBS, we find that initial yield spreads of MBS incorporate more information than credit ratings and predict future downgrades, even after conditioning on initial credit ratings. Predictive power of spreads is higher during credit and housing bubbles and for the least risky AAA-rated MBS. We find that initial yield spreads capture the magnitude of rating downgrades, especially during asset bubble periods. As a novel approach in this literature, we also utilise machine learning techniques (regression trees, naïve Bayes, support vector machines and random forests) to confirm our results.
Description: JEL Classification: G21; G28.
ISSN: 0924-865X
Other Identifiers: ORCID iD: Alper Kara
Appears in Collections:Dept of Economics and Finance Research Papers

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