Mortgage Dollar Roll

Review of Financial Studies (Forthcoming)

72 Pages Posted: 27 Feb 2014 Last revised: 5 Aug 2018

See all articles by Zhaogang Song

Zhaogang Song

Johns Hopkins University - Carey Business School

Haoxiang Zhu

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: July 2, 2018

Abstract

Mortgage dollar roll is the most common financing strategy for agency MBS. Effectively a collateralized loan, it differs from repos in two important ways: the returned collateral can differ from those received, and the MBS ownership changes hands in the funding period. Therefore, dollar roll ``specialness''--how much implied financing rates fall below MBS repo rates--is an important indicator of MBS funding conditions.

Using a proprietary data set, we find that dollar roll specialness: (i) increases in the value of the cheapest-to-deliver option, (ii) decreases in the leverage of primary dealers, (iii) decreases in prepayment risk exposure during the financing period, and (iv) decreases in expected MBS returns.

During its QE operation, the Federal Reserve's dollar roll sales are associated with lower specialness, consistent with its objective to mitigate the (negative) impact of QE on MBS funding market.

Keywords: MBS, Dollar Roll, TBA, Specialness

JEL Classification: G12, G18, G21, E58

Suggested Citation

Song, Zhaogang and Zhu, Haoxiang, Mortgage Dollar Roll (July 2, 2018). Review of Financial Studies (Forthcoming). Available at SSRN: https://ssrn.com/abstract=2401319 or http://dx.doi.org/10.2139/ssrn.2401319

Zhaogang Song

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Haoxiang Zhu (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street E62-623
Cambridge, MA 02142
United States

HOME PAGE: http://www.mit.edu/~zhuh

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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