Jump and Cojump Risk in Subprime Home Equity Derivatives

I analyze the risk in the ABX index of asset backed, subprime, home equity credit default swaps and CME housing futures. Using estimators of the jump and cojump components of security prices, I determine that: (1) jump risk was rising throughout 2006, well before any problems in the mortgage market were discussed in the press or policy circles; (2) news explains up to 40% of the jump risk in the AAA rated ABX index and 24% in the BBB-; (3) The jump risk between the ABX and housing futures market is inversely related; (4) the slope of the housing futures term structure is significantly related to the jump risk.