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Mortgage Risk and the Yield CurveAytek MalkhozovBoard of Governors of the Federal Reserve System Philippe MuellerLondon School of Economics & Political Science (LSE) - Department of Finance Andrea VedolinLondon School of Economics and Political Science Gyuri VenterCopenhagen Business School January 22, 2016 The Review of Financial Studies, Forthcoming 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.
Number of Pages in PDF File: 50 Keywords: Term Structure of Interest Rates, MBS, Supply Factor JEL Classification: E43, G11, G12, G21 Date posted: March 21, 2013 ; Last revised: January 23, 2016Suggested CitationContact Information
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