Asset Pricing with Cohort-Based Trading in MBS Markets

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: 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). FRB of New York Staff Report No. 931, Rev. July 2021, Available at SSRN: https://ssrn.com/abstract=3641571 or http://dx.doi.org/10.2139/ssrn.3641571