Does Mortgage Hedging Raise Long-Term Interest Rate Volatility?

Posted: 26 Oct 2008

See all articles by Yan Chang

Yan Chang

Federal Home Loan Mortgage Corporation (FHLMC)

Douglas A. McManus

Federal Home Loan Mortgage Corporation (FHLMC)

Buchi Ramagopal

affiliation not provided to SSRN

Date Written: October 25, 2008

Abstract

An examination of the impact of mortgage hedging activities on interest rate volatility considers a wide range of interest rate derivatives to isolate the sources that might be contributing to volatility. Over a rolling window providing estimates of key parameters, the measured effects of mortgage hedging on volatility are distorted by two outlier episodes: the collapse of Long-Term Capital Management, and the market reaction in the aftermath of the September 2001 events. Eliminating these episodes from the data shows that hedging appears to stabilize rate volatility over some periods while exacerbating it in others. The conclusion: that no simple relationship between hedging and rate volatility is clear.

Keywords: hedging, interest rate volatility

JEL Classification: G21, G12

Suggested Citation

Chang, Yan and McManus, Douglas A. and Ramagopal, Buchi, Does Mortgage Hedging Raise Long-Term Interest Rate Volatility? (October 25, 2008). Journal of Fixed Income, Vol. 17, March 2005, Available at SSRN: https://ssrn.com/abstract=1289832

Yan Chang

Federal Home Loan Mortgage Corporation (FHLMC) ( email )

8200 Jones Branch Road
McLean, VA 22101
United States

Douglas A. McManus (Contact Author)

Federal Home Loan Mortgage Corporation (FHLMC) ( email )

8200 Jones Branch Road
McLean, VA 22101
United States
703-903-2953 (Phone)

Buchi Ramagopal

affiliation not provided to SSRN ( email )

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