Mortgage Dollar Roll
Federal Reserve Board
Massachusetts Institute of Technology (MIT) - Sloan School of Management
March 13, 2014
Mortgage dollar roll is the most important trading strategy for investors to finance their positions in agency mortgage-backed securities (MBS). The "specialness" of dollar roll is the extent to which the implied dollar roll financing rates fall below prevailing market interest rates. This paper provides the first analysis of dollar roll specialness in agency MBS markets, using a large panel dataset from July 1998 to July 2013. We show that the dollar roll specialness increases in prepayment risks (proxied by primary mortgage rates and "burn-out effect") and decreases in MBS supply. The expected returns of agency MBS decrease in their dollar roll specialness. We find evidence that the Federal Reserve's large-scale asset purchase (LSAP) increases dollar roll specialness by pushing down mortgage rates, but not by reducing the effective supply of MBS.
Number of Pages in PDF File: 53
Keywords: MBS, Mortgage Dollar Roll, TBA, Specialness, LSAP, Repo
JEL Classification: G12, G18, G21, E58working papers series
Date posted: February 27, 2014 ; Last revised: March 19, 2014
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