Asset Pricing with Cohort-Based Trading in MBS Markets

66 Pages Posted: 20 Jul 2020 Last revised: 6 Jul 2021

See all articles by Nicola Fusari

Nicola Fusari

Johns Hopkins University - Carey Business School

Wei Li

Johns Hopkins University - Carey Business School

Haoyang Liu

Federal Reserve Bank of New York

Zhaogang Song

Johns Hopkins University - Carey Business School

Multiple version iconThere are 2 versions of this paper

Date Written: June 27, 2020

Abstract

Agency MBSs with diverse characteristics are traded in parallel with individualized specified pool (SP) contracts and standardized to-be-announced (TBA) contracts. This parallel trading environment has distinctive effects on MBS pricing and trading: (1) Although cheapest-to-deliver (CTD) issues are present only in TBA contracts and absent from SP trading by definition, MBS heterogeneity associated with CTD discounts affects SP returns positively, with the effect stronger for lower-value SPs; (2) High selling pressure amplifies the effects of MBS heterogeneity on SP returns; (3) Greater MBS heterogeneity dampens SP and TBA trading activities but increases their ratio.

Keywords: Cohort, Heterogeneity, Liquidity, MBS, Prepayment, TBA

JEL Classification: G12, G18, G21, E58

Suggested Citation

Fusari, Nicola and Li, Wei and Liu, Haoyang and Song, Zhaogang, Asset Pricing with Cohort-Based Trading in MBS Markets (June 27, 2020). Available at SSRN: https://ssrn.com/abstract=3637015 or http://dx.doi.org/10.2139/ssrn.3637015

Nicola Fusari

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Wei Li (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Haoyang Liu

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Zhaogang Song

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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