Abstract

One of the most peculiar economic phenomena currently known is contagion. Contagion occurs when either a market or a commodity faces economic woes as a result of another market or commodity, when in theory (or empirically) the two goods or markets are not linked. The most common method for identifying contagion empirically is by a sudden and significant increase in correlation between markets or commodities when one of the commodities or markets is in crisis. So far, literature on the subject has focused on proving the existence of contagion. This study will focus on providing evidence to either support or refute the theory that mortgage bonds were a contagious good during the Subprime Mortgage Crisis, and will use labor as a market potentially impacted by this particular contagious good. During the mortgage crisis of 2007, the mortgage bond is largely credited with causing widespread economic turmoil which resulted in a significant reduction in output and a deleteriously impacted labor market, as shown by the significant increase in the unemployment rate during the crisis period from December 2007 to June 2009. This empirical study examines the evidence that the mortgage bond market was a contagious good, and spread its contagion to the labor market as a result of the crisis, through a lengthy recession. The paper looks for evidence of an increase in cross-market correlation during the Subprime Mortgage Crisis, and tests the hypothesis that there was such an increase. To do this, the study first develops a conceptual framework through which the mortgage bond market may have been contagious with the labor market, then tests the empirical data using OLS regression to determine if such an increase (marked by a significant interaction variable with a negative regression coefficient) manifested. The study finds that the data is spurious, and thus, it cannot establish any causal relationship between the mortgage bond market and the labor market.

Advisor

Krause, Brooke

Department

Business Economics

Disciplines

Other Business

Keywords

contagion

Publication Date

2017

Degree Granted

Bachelor of Arts

Document Type

Senior Independent Study Thesis

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© Copyright 2017 Alexander Goldstein