Equilibrium Subprime Lending

Makarov, Igor and Plantin, Guillaume (2013) Equilibrium Subprime Lending. Journal of Finance, vol.68 (n°3). pp. 849-879.

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Official URL: http://tse-fr.eu/pub/28057


This paper develops an equilibrium model of a subprime mortgage market. Our goal is to offer a benchmark with which the recent subprime boom and bust can be compared. The model is tractable and delivers plausible orders of magnitude for borrowing capacities, as well as default and trading intensities. We offer simple explanations for several phenomena in the subprime market, such as the prevalence of teaser rates and the clustering of defaults. In our model, both nondiversifiable and diversifiable income risks reduce debt capacities. Thus, debt capacities need not be higher when a larger fraction of income risk is diversifiable.

Item Type: Article
Language: English
Date: June 2013
Refereed: Yes
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 09 Jul 2014 17:43
Last Modified: 09 Apr 2018 09:19
OAI ID: oai:tse-fr.eu:28057
URI: http://publications.ut-capitole.fr/id/eprint/15878

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