Asset Pricing with Cohort-Based Trading in MBS Markets

52 Pages Posted: 20 Jul 2020 Last revised: 7 Aug 2020

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 mortgage backed securities (MBSs) with diverse characteristics are traded in parallel with individualized contracts in the specified pool (SP) market and with standardized contracts in the to-be-announced (TBA) market. We find that this unique parallel trading environment substantially affects MBS returns: (1) Greater heterogeneity in MBS values increases the yields of all MBSs because it exacerbates the cheapest-to-deliver concerns for TBA buyers and reduces the value of the TBA market as a backup selling venue for SP buyers; (2) high selling pressure amplifies the impact of MBS heterogeneity on MBS yields; (3) greater MBS heterogeneity dampens trading activities on both the SP and TBA markets and increases the ratio between the two. We provide strong evidence that these effects differ from the impacts of prepayment risks.

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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
20
Abstract Views
193
PlumX Metrics