Cohort Trading and Security Design: Evidence from Agency MBS Markets
85 Pages Posted: 21 Dec 2020 Last revised: 25 Oct 2021
Date Written: October 24, 2021
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. Cohort-trading-induced strategic MBS design increases issuers' selling revenue by 36% of the SP transaction costs.
Keywords: Cohort trading, MBS, Security design, Specified pool, TBA.
JEL Classification: D4, G2
Suggested Citation: Suggested Citation