Mortgage Dollar Roll
Federal Reserve Board
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, E58working papers series
Date posted: February 27, 2014 ; Last revised: August 23, 2014
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