CDO market implosion and the pricing of subprime mortgage-backed securities

► We evaluate the effects of CDO issuance on the pricing of subprime mortgage-backed securities. ► The surge of subprime-backed CDO market was associated with a significant tightening of subprime yield spreads. ► Substantial subprime MBS spread widened in the wake of implosion in the CDO market. ► Supply/demand shocks associated with financial innovations are important to the pricing of securitized subprime debt.