Cardiff University | Prifysgol Caerdydd ORCA
Online Research @ Cardiff 
WelshClear Cookie - decide language by browser settings

Financial contagion from the US structured finance market: evidence from international markets and asset pricing perspectives

Leung, Woon Sau ORCID: 2014. Financial contagion from the US structured finance market: evidence from international markets and asset pricing perspectives. PhD Thesis, Cardiff University.
Item availability restricted.

[thumbnail of Thesis]
PDF (Thesis) - Accepted Post-Print Version
Download (2MB) | Preview
[thumbnail of Woon Sau Leung.pdf] PDF - Supplemental Material
Restricted to Repository staff only

Download (265kB)


Given the growing importance of securitisation to financial stability, it is surprising that empirical studies on the role of the US structured finance market in the recent crisis have been relatively sparse. To fill this gap, this thesis studies the US structured finance market (tracked by the ABX indices) and addresses various important research questions specific to the recent 2007 to 2009 financial crisis. First, I contribute to the contagion literature by extending Longstaff’s (2010) investigation to an international market perspective. Evidence of contagion from the ABX indices to the G5 international equity and government bond markets via the funding illiquidity and credit risk channels during the subprime crisis is documented. Second, I formulate a multifactor model with crisis interaction effects and document significant increases in the ABX AAA factor loadings during the subprime crisis, which is consistent with contagion. My cross-sectional pricing tests show that the ABX AAA factor significantly explains the cross-section of expected returns during the subprime crisis; that is, the impact of contagion on the US equity market was reasonably systematic. I compute a simple statistic that gauges the degree of the stocks’ exposure to the ABX innovations in each month and find that the exposure spiked in February, July and October 2007 and in February, July and November 2008. Third, I investigate whether the US bank holding companies’ fundamental characteristics determine bank equity risks during the recent crisis. I depart from prior studies and consider bank equity risks relating to the banks’ exposure to the ABX innovations, the asset-backed money market and the market wide default risk in a variance decomposition. My study establishes the link between the banks’ fundamental and equity risks, and shows that banks’ regulatory capital requirement is an effective means to limit banks’ exposure to systemic risks in relation to funding illiquidity. Lastly, I document compelling evidence of quarterly bank stock return predictability based on variables relating to banks’ profitability, loan asset credit quality, capital adequacy and equity risks over the 2006 to 2011 period. By studying the turnover ratios and order flows, I show that bank stocks with weaker fundamentals and smaller size were traded more intensely in the following quarter while the higher trading activity was dominated by selling pressure. The evidence lends support to my ‘fire sale’ or ‘flight-to-safety’ hypothesis and reveals that the banks’ fundamental variables and size were the major criteria used by investors in formulating their ‘flight’ decisions during the recent crisis

Item Type: Thesis (PhD)
Status: Unpublished
Schools: Business (Including Economics)
Subjects: H Social Sciences > HG Finance
Date of First Compliant Deposit: 30 March 2016
Last Modified: 06 Oct 2023 14:54

Actions (repository staff only)

Edit Item Edit Item


Downloads per month over past year

View more statistics