Asset Pricing with Cohort-Based Trading in MBS Markets

67 Pages Posted: 7 Jul 2020 Last revised: 11 Aug 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: July 1, 2020

Abstract

Agency MBSs with diverse characteristics are traded in parallel through individualized specified pool (SP) contracts and standardized to-be-announced (TBA) contracts. This parallel trading environment generates distinctive effects on MBS pricing and trading: (1) Although cheapest-to-deliver (CTD) issues are present in TBA trading and absent from SP trading by design, 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: E58, G12, G18, G21

Suggested Citation

Fusari, Nicola and Li, Wei and Liu, Haoyang and Song, Zhaogang, Asset Pricing with Cohort-Based Trading in MBS Markets (July 1, 2020). Available at SSRN: https://ssrn.com/abstract=3641571 or http://dx.doi.org/10.2139/ssrn.3641571

Nicola Fusari

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Wei Li

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Haoyang Liu (Contact Author)

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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