ritgerd2 - WP/08/186 Real Effects of the Subprime Mortgage...

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WP/08/ 186 Real Effects of the Subprime Mortgage Crisis: Is it a Demand or a Finance Shock? Hui Tong and Shang-Jin Wei
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© 2008 International Monetary Fund WP/08/ 186 IMF Working Paper W e s t e r n Hemisphere Department Real Effects of the Subprime Mortgage Crisis: Is it a Demand or a Finance Shock? Prepared by Hui Tong and Shang-Jin Wei 1 Authorized for distribution by Tamim Bayoumi July 2008 Abstract This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. We develop a methodology to study how the subprime crisis spills over to the real economy. Does it manifest itself primarily through reducing consumer demand or through tightening liquidity constraint on non-financial firms? Since most non-financial firms have much larger cash holding than before, they appear unlikely to face significant liquidity constraint. We propose a methodology to estimate these two channels of spillovers. We first propose an index of a firm±s sensitivity to consumer demand, based on its response to the 9/11 shock in 2001. We then construct a separate firm-level index on financial constraint based on Whited and Wu (2006). We find that both channels are at work, but a tightened liquidity squeeze is economically more important than a reduced consumer spending in explaining cross firm differences in stock price declines. JEL Classification Numbers: G2, G3 Keywords: liquidity constraint, demand contraction Author±s E-Mail Address: Htong@imf.org, shangjin.wei@columbia.edu 1 We thank Tam Bayoumi, Stijn Claessens, Marcello Estevao, Laura Kodres, Luc Laeven, Neng Wang, Toni Whited, Yishay Yafeh, and seminar/conference participants at the IMF and the International Finance Conference sponsored by Bank of Canada and Queen±s University for helpful comments, and Andrew Swiston and Natalia Barrera Tovar for excellent research assistance.
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2 Contents Page I. Introduction . ..................................................................................................................... 3 II. Specification and Key Variables . ..................................................................................... 8 A. Basic Specification. ................................................................................................. 8 B. Key Data . ................................................................................................................ 9 III. Empirical Analysis . ........................................................................................................ 13 A. Basic Results. ........................................................................................................ 13 B. Evolving Roles of Liquidity Constraint and Demand Contractions . .................... 15 C. Alternative Measure of Financial Dependence. .................................................... 17 D. Placebo Tests. ........................................................................................................ 18 E. Exposures to Exchange Rate and Commodity Price Movement . ......................... 19 F. Additional Robustness Checks and Extensions . ................................................... 22 IV. Conclusion . .................................................................................................................... 23 References . .............................................................................................................................. 25 Tables 1a. Summary Statistics. ........................................................................................................ 27 1b. Correlation Among Variables. ........................................................................................ 27 2. Change in Stock Price during the Subprime Crisis . ....................................................... 28 3. Alternative Measure of Financial Dependence . ............................................................. 29 4. Does Liquidity Constraint Explain Changes in Stock Prices During September 10±28, 2001?. ...................................................................................... 30 5. Placebo Tests: Stock Price Changes Before the Subprime Crises . ................................ 31 6. Adding Exposures to Exchange Rate and Commodity Price Movement. ...................... 32 Figures 1. The Log of Stock Index during Subprime Crisis. ........................................................... 33 2. News Count of ²Subprime³ and ²Crisis³. ...................................................................... 33 3. Consensus Forecast of U.S. Real GDP Growth .
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This note was uploaded on 12/08/2011 for the course ENGINEERIN 101 taught by Professor Siggabeinteins during the Spring '11 term at Uni. Reykjavik.

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ritgerd2 - WP/08/186 Real Effects of the Subprime Mortgage...

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