The Real Effects of Secondary Market Trading Structure: Evidence from the Mortgage Market

62 Pages Posted: 10 May 2019 Last revised: 11 Jun 2020

See all articles by Yesol Huh

Yesol Huh

Board of Governors of the Federal Reserve System - Division of Research and Statistics

You Suk Kim

Board of Governors of the Federal Reserve System

Date Written: October 29, 2019

Abstract

Do liquidity and trading structure of the secondary market matter for individuals who do not participate directly in financial markets? We study this question in the market for agency mortgage-backed securities (MBS), where most trades happen through the liquid to-be-announced (TBA) market. We quantify the effect of this distinct secondary market trading structure on mortgage rates and demand for mortgages. Exploiting discontinuities in TBA eligibility, we estimate that TBA eligibility reduces mortgage rates by 7 to 22 basis points, depending on the expected prepayment of the loan. Furthermore, we provide evidence that TBA eligibility affects borrowers' refinancing decisions.

Keywords: mortgage-backed securities, liquidity, primary market, TBA trades, refinancing, mortgages

JEL Classification: E44, G10, G21

Suggested Citation

Huh, Yesol and Kim, You Suk, The Real Effects of Secondary Market Trading Structure: Evidence from the Mortgage Market (October 29, 2019). Available at SSRN: https://ssrn.com/abstract=3373949 or http://dx.doi.org/10.2139/ssrn.3373949

Yesol Huh

Board of Governors of the Federal Reserve System - Division of Research and Statistics ( email )

20th and C Streets, NW
Washington, DC 20551
United States
(202) 973-6943 (Phone)

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

You Suk Kim (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
49
Abstract Views
583
PlumX Metrics