Real Effects of the Subprime Mortgage Crisis: Is it a Demand or a Finance Shock?
Electronic Access:
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Summary:
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.
Series:
Working Paper No. 2008/186
Subject:
Asset prices Commodity prices Liquidity Liquidity indicators Stocks
English
Publication Date:
July 1, 2008
ISBN/ISSN:
9781451870442/1018-5941
Stock No:
WPIEA2008186
Pages:
37
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