Cohort Trading and Security Design: Theory and Evidence from Agency MBS Markets

77 Pages Posted: 21 Dec 2020 Last revised: 14 Jun 2021

See all articles by Yu An

Yu An

Johns Hopkins Carey Business School

Wei Li

Johns Hopkins University - Carey Business School

Zhaogang Song

Johns Hopkins University - Carey Business School

Date Written: March 4, 2021

Abstract

Agency MBSs are traded via both specified pool (SP) contracts for individual securities and to-be-announced (TBA) contracts for a cohort of heterogeneous securities. We document the economic effects of cohort trading on issuers' security design: (1) Low-value and high-value loans are securitized into separate groups of MBSs sold in TBA and SP markets respectively; (2) issuers pool low-value loans together into TBA MBSs, but separate high-value loans into different SP MBSs; (3) larger issuers take more advantage of cohort trading when designing MBSs. The economic benefits of strategic security design to issuers are about 36% of the SP transaction costs.

Keywords: Cohort trading, MBS, Security design, Specified pool, TBA.

JEL Classification: D4, G2

Suggested Citation

An, Yu and Li, Wei and Song, Zhaogang, Cohort Trading and Security Design: Theory and Evidence from Agency MBS Markets (March 4, 2021). Available at SSRN: https://ssrn.com/abstract=3674660 or http://dx.doi.org/10.2139/ssrn.3674660

Yu An

Johns Hopkins 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

Zhaogang Song (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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