Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/241124 
Year of Publication: 
2021
Series/Report no.: 
Staff Report No. 931
Publisher: 
Federal Reserve Bank of New York, New York, NY
Abstract: 
Agency mortgage backed securities (MBS) with diverse characteristics are traded in parallel with individualized contracts in the specified pool (SP) market and with standardized contracts in the to-be-announced (TBA) market. We find that this unique parallel trading environment significantly affects MBS returns: (1) Greater heterogeneity in MBS values increases the yields of all MBS, because it exacerbates the cheapest-to-deliver concerns for TBA buyers and reduces the value of the TBA market as a backup selling venue for SP buyers; (2) high selling pressure amplifies the impact of MBS heterogeneity on MBS yields; and (3) greater MBS heterogeneity dampens trading activities on both the SP and TBA markets but increases the ratio between the two. We provide evidence that these effects differ from the impacts of prepayment risks.
Subjects: 
cohort
heterogeneity
liquidity
MBS
prepayment
TBA
JEL: 
E58
G12
G18
G21
Document Type: 
Working Paper

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