TBA Trading and Security Issuance in the Agency MBS Market

59 Pages Posted: 21 Dec 2020 Last revised: 19 Dec 2023

See all articles by Yu An

Yu An

Johns Hopkins Carey Business School

Wei Li

CUNY Baruch College

Zhaogang Song

Johns Hopkins University - Carey Business School

Date Written: December 15, 2023

Abstract

In addition to the standard individual-security-based specified pool (SP) contract, agency MBS are actively traded via the to-be-announced (TBA) contract that sets a uniform price for a cohort of heterogeneous securities. We provide empirical support for the economic effect of TBA trading on MBS issuers' security design: issuers pick low-quality loans and pool them together into few TBA MBS. We then conduct a quantitative analysis and show that TBA-trading-induced strategic MBS design increases issuers' selling revenue by about 55% of the SP transaction costs. Finally, we show that smaller issuers are less able to package low-quality loans separately from high-quality ones and hence benefit less from TBA trading.

Keywords: Cohort, MBS, Security design, Specified pool, TBA.

JEL Classification: D4, G2

Suggested Citation

An, Yu and Li, Wei and Song, Zhaogang, TBA Trading and Security Issuance in the Agency MBS Market (December 15, 2023). Available at SSRN: https://ssrn.com/abstract=3674660 or http://dx.doi.org/10.2139/ssrn.3674660

Yu An

Johns Hopkins Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Wei Li

CUNY Baruch College ( email )

17 Lexington Avenue
New York, NY 10021
United States

Zhaogang Song (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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