The Real Effects of Secondary Market Trading Structure: Evidence from the Mortgage Market
62 Pages Posted: 10 May 2019 Last revised: 11 Jun 2020
Date Written: October 29, 2019
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: Suggested Citation