Mortgage Risk and the Yield Curve

53 Pages Posted: 15 Dec 2015

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: December 2015

Abstract

We study the feedback from the risk of outstanding mortgage-backed securities (MBS) on the level and volatility of interest rates. We incorporate the 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: (i) MBS duration positively predicts nominal and real excess bond returns, especially for longer maturities; (ii) the predictive power of MBS duration is transitory in nature; and (iii) MBS convexity increases interest rate volatility, and this effect has a hump-shaped term structure.

The appendix for this paper can be found at http://ssrn.com/abstract=2703808.

Keywords: Term structure of interest rates, MBS, supply factor

JEL Classification: G12, G21, E43

Suggested Citation

Malkhozov, Aytek and Mueller, Philippe and Vedolin, Andrea and Venter, Gyuri, Mortgage Risk and the Yield Curve (December 2015). BIS Working Paper No. 532. Available at SSRN: https://ssrn.com/abstract=2703475

Aytek Malkhozov (Contact Author)

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

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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