Recent Blog Posts
-
The Times' Rorshach Geithner Story
Apr 27 20099:04am EDT -
Sinking Animal Spirits
Apr 27 20098:04am EDT -
Counter-cyclical Urban Policy
Apr 26 200910:04am EDT -
Be Your Own Counterfeiter
Apr 26 20099:04am EDT -
Being Tim Geithner
Apr 25 200912:04pm EDT -
Notes From a Press Conference Naif
Apr 25 20099:04am EDT -
What Good is the News?
Apr 25 20098:04am EDT -
Stressful Enough
Apr 24 20092:04pm EDT -
Not Regretting the Pound
Apr 24 20091:04pm EDT -
Introducing the New Ford Squeeze
Apr 24 20099:04am EDT -
Non-Economic Questions of the Day
Apr 24 20099:04am EDT -
The Stress Test Blind Alley
Apr 24 20098:04am EDT -
Happy Hour
Apr 23 20099:04pm EDT -
Recovery Without Rebalancing
Apr 23 20096:04pm EDT -
The Shape of Your Recession
Apr 23 20095:04pm EDT
Links
- Felix Salmon

- DealBreaker

- Ryan Avent: The Bellows

- The Epicurean Dealmaker

- Chris Anderson

- Ultimi Barbarorum

- MarketBeat

- Michelle Leder

- John Quiggin

- The Panelist

- Andrew Leonard

- Streetsblog

- Brad Setser

- Michael Mandel

- Financial Crookery

- Kash Mansori

- Dean Baker

- Calculated Risk

- Free Exchange

- Curbed

- Lance Knobel

- Econospeak

- Carbon Tax Center

- Overcoming Bias

- Mark Thoma

- Naked Capitalism

- Alphaville

- Barry Ritholtz

- Alexander Campbell

- The Bayesian Heresy

- Brad DeLong

- DealBook

- Greg Mankiw

- Deal Journal

- FP Passport

- Carl Bialik

- Marginal Revolution

- A Fistful of Euros

- Dan Gross

Credit-Bubble Datapoints of the Day
The financial markets were very wrong when it came to judging credit risk on subprime loans. Now, Haas School professor Nancy Wallace reckons that commercial mortgages, too, are mispriced.
Working with Haas Associate Professor Richard Stanton and Rice University Assistant Professor Christopher Downing, Wallace developed a new way to calculate the implied volatility of the return on properties underlying commercial mortgage-backed securities. The trio was the first to provide an empirical test of such a model, using a sample of 14,000 properties in 206 deals between 1996 and 2005. They found that the return volatilities by property types are substantially larger than those calculated by either rating agencies or investment banks.
"Our estimates suggest that some investment-grade (as opposed to speculative) bonds in commercial mortgage-backed securities are likely to be at greater risk of default than current ratings suggest," Wallace says. "We are concerned that defaults will be higher than expected if there are even relatively modest commercial property market corrections."
Meanwhile, half of the bond issuers in the world now have a junk rating, and it isn't costing them: they pay just 160 basis points more on their debt than an investment-grade issuer would. That's easily an all-time low.
OK, so let's assume that everything in the fixed-income market is mispriced. Now what? It's too late to do anything about it, so should we just sit back and enjoy the liquidity? After all, bubbles are good for you, right?






