Christof W. Stahel

Are Foreclosures Contagious

Using a large sample of U.S. mortgages observed over the 2005-2009 period, we find that foreclosures are contagious. After controlling for major factors known to influence a borrower’s decision to default, including borrower and loan characteristics, local demographic and economic conditions, and changes in property values, the likelihood of a mortgage default increases by as much as 24% with a one standard deviation increase in the foreclosure rate of the borrower’s surrounding zip code. We find that foreclosure contagion is most prevalent among strategic defaulters: borrowers who are underwater on their mortgage but are not likely to be financially distressed. Taken together, the evidence supports the notion that foreclosures are contagious.

The Transaction Costs of Trading Corporate Credit

To examine whether corporate credit risk is cheaper to trade in the bond or credit-default swap (CDS) market, we estimate individual roundtrip transaction costs for 851 CDSs traded during 2009-2014. Effective half-spreads are 14 bps of the notional amount for dealer-to-enduser and 12 bps for dealer-to-dealer trades for the most common notional traded,

Contagion Effects in Strategic Mortgage Defaults

2.5-7.5M. Cross-sectionally, effective spreads are weakly correlated with indicative quoted spreads, higher for more actively traded contracts, and related to reference obligation/entity characteristics. For institutional-size trades up to

Does Supervisory Discipline Reduce Bank Risk? Evidence from Before, During, and after the Crisis

500K, bonds are three times as expensive as the corresponding CDSs, but at larger trade sizes this pattern reverses.

Hedge Fund Contagion and Liquidity Shocks

Using a large sample of U.S. mortgages observed over the 2005–2009 period, we document contagion effects in strategic mortgage defaults. Strategic defaults result from borrowers choosing to exercise their in the money default option and our findings suggest this choice is influenced by the delinquency rate in surrounding zip codes (within a 5 mile radius), after controlling for other known determinants of mortgage default. These controls include a large array of borrower and loan characteristics, local demographic and economic conditions, spatial correlations, and changes in property values. Our findings that the local area delinquency rate is an important factor for strategic defaulters (borrowers that can be influenced in their decision) but not for defaults that are the result of inability to pay (borrowers that had no choice) lend support the contagion hypothesis. Our estimates suggest that a 1% increase in the local area delinquency rate may increase the probability of a strategic default by 7.25–16.5%.

Momentum in Corporate Bond Returns

This paper investigates the effectiveness of supervisory discipline on bank risk over the years immediately before, during and just after the recent crisis. It is the first study to consider the effects of informal supervisory enforcement actions in addition to formal actions. Informal enforcement actions are not only much more numerous than the formal enforcement actions used in previous studies, but they are also often confidential, whereas formal enforcement actions must be public. Access to this information allows a complete analysis of the effects of regulatory enforcement actions on bank capital. Pre-crisis, results strongly support the risk-reducing (capital enhancing) effects of informal actions and find that using only information on formal actions leads to substantial bias. During the crisis, formal actions became a much more effective tool for slowing declines in a bank’s capital ratios and informal actions were relatively less potent. Post-crisis, while it appears that the effects of enforcement actions are moving back toward the “normal�? times of the pre-crisis period, the statistical relationship between supervisory discipline and target capital is less clear. In all three periods banks had strong incentives to achieve their capital targets while they were in the higher prompt corrective action capital zones. TARP capital helped quicken a bank’s adjustment speed to its capital target during the crisis, but appears to slow this speed post-crisis.