Mortgage Dollar Roll

Zhaogang Song

Federal Reserve Board

Haoxiang Zhu

Massachusetts Institute of Technology (MIT) - Sloan School of Management

August 22, 2014

Mortgage dollar roll is the most important trading strategy for investors to finance agency mortgage-backed securities (MBS). A dollar roll contract allows the cash lender to receive one security as collateral and return a similar but different security later. The "specialness'' of dollar roll is the extent to which the implied financing rates fall below prevailing market interest rates. This paper provides the first analysis of the economics of dollar roll specialness, using a large panel data set from July 1998 to July 2013. We show that the dollar roll specialness increases in the redelivery risk associated with the cheapest-to-deliver option, and decreases in the liquidity of MBS. Moreover, the dollar roll specialness is negatively associated with expected returns on MBS. Finally, we find that the Federal Reserve's MBS purchases are associated with a higher redelivery-risk component of dollar roll specialness but a lower liquidity component.

Number of Pages in PDF File: 56

Keywords: Dollar Roll, TBA, MBS, Specialness, LSAP

JEL Classification: G12, G18, G21, E58

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Date posted: February 27, 2014 ; Last revised: August 23, 2014

Suggested Citation

Song, Zhaogang and Zhu, Haoxiang, Mortgage Dollar Roll (August 22, 2014). Available at SSRN: http://ssrn.com/abstract=2401319 or http://dx.doi.org/10.2139/ssrn.2401319

Contact Information

Zhaogang Song
Federal Reserve Board ( email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States
Haoxiang Zhu (Contact Author)
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
Cambridge, MA 02142-1347
United States
HOME PAGE: http://www.mit.edu/~zhuh
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