Spreads on Non-subprime AAA Bonds vs Counterparty Risk
The Graph of the Week comes from the article "E-Coli, Repo Madness, and the Financial Crisis" by Gary Gorton in the July issue of Business Economics. From the article:
Figure 1 shows the LIBOR-OIS spread, a measure of interbank counterparty risk, together with the spreads on AAA tranches of bonds backed by student loans, credit card receivables, and auto loans.2 The units on the y-axis are basis points above or below LIBOR. The three types of bonds normally trade at spreads near or below LIBOR. Yet, in the crisis, they spiked dramatically upward, and they moved with the measure of bank counterparty risk. Why?
To find out why, read the full article NABE members can download the full article for free at the Palgrave siet. Non-members can buy the article online.
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