Liquidity in a Market for Unique Assets: Specified Pool and TBA Trading in the Mortgage Backed Securities Market

67 Pages Posted: 13 Dec 2015 Last revised: 3 Sep 2016

See all articles by Pengjie Gao

Pengjie Gao

University of Notre Dame - Mendoza College of Business

Paul H. Schultz

University of Notre Dame - Department of Finance

Zhaogang Song

Johns Hopkins University - Carey Business School

Date Written: September 2, 2016

Abstract

Agency mortgage-backed securities trade simultaneously in a market for specified pools (SPs) and in the to-be-announced (TBA) forward market. TBA trading creates liquidity by allowing thousands of different MBS to be traded in a handful of TBA contracts. SPs that are eligible to be traded as TBAs have significantly lower trading costs than other SPs. We present evidence that TBA eligibility, in addition to characteristics of TBA eligible SPs, lowers trading costs. We show that dealers hedge SP inventory with TBA trades, and they are more likely to prearrange trades in SPs that are difficult to hedge.

Keywords: mortgage backed securities, OTC Market, Liquidity

JEL Classification: G10, G18, G24

Suggested Citation

Gao, Pengjie and Schultz, Paul H. and Song, Zhaogang, Liquidity in a Market for Unique Assets: Specified Pool and TBA Trading in the Mortgage Backed Securities Market (September 2, 2016). Available at SSRN: https://ssrn.com/abstract=2702542 or http://dx.doi.org/10.2139/ssrn.2702542

Pengjie Gao

University of Notre Dame - Mendoza College of Business ( email )

246 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
(574) 631-8048 (Phone)

HOME PAGE: http://​sites.google.com/site/gpengjie/

Paul H. Schultz (Contact Author)

University of Notre Dame - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States
219-631-3338 (Phone)
219-631-5255 (Fax)

Zhaogang Song

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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