Mortgage Risk and the Yield Curve

The Review of Financial Studies, Forthcoming

50 Pages Posted: 21 Mar 2013 Last revised: 23 Jan 2016

See all articles by Aytek Malkhozov

Aytek Malkhozov

Board of Governors of the Federal Reserve System

Philippe Mueller

Warwick Business School Finance Group

Andrea Vedolin

Boston University - Department of Finance & Economics

Gyuri Venter

Warwick Business School

Multiple version iconThere are 2 versions of this paper

Date Written: January 22, 2016

Abstract

We study feedback from the risk of outstanding mortgage-backed securities (MBS) on the level and volatility of interest rates. We incorporate supply shocks resulting from changes in MBS duration into a parsimonious equilibrium dynamic term structure model and derive three predictions that are strongly supported in the data: (1) MBS duration positively predicts nominal and real excess bond returns, especially for longer maturities; (2) the predictive power of MBS duration is transitory in nature; and (3) MBS convexity increases interest rate volatility, and this effect has a hump-shaped term structure.

Keywords: Term Structure of Interest Rates, MBS, Supply Factor

JEL Classification: E43, G11, G12, G21

Suggested Citation

Malkhozov, Aytek and Mueller, Philippe and Vedolin, Andrea and Venter, Gyuri, Mortgage Risk and the Yield Curve (January 22, 2016). The Review of Financial Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2235592 or http://dx.doi.org/10.2139/ssrn.2235592

Aytek Malkhozov

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Philippe Mueller

Warwick Business School Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

Andrea Vedolin (Contact Author)

Boston University - Department of Finance & Economics ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Gyuri Venter

Warwick Business School ( email )

University of Warwick, Gibbet Hill Road
Coventry, CV4 7AL
United Kingdom

HOME PAGE: http://sites.google.com/site/gyuriventer/

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