The Causal Effect of Mortgage Refinancing on Interest-Rate Volatility: Empirical Evidence and Theoretical Implications

57 Pages Posted: 22 Jul 2004  

Jefferson Duarte

Rice University

Multiple version iconThere are 3 versions of this paper

Date Written: November 17, 2005

Abstract

This paper investigates the effects of mortgage-backed securities (MBS) hedging activity on interest-rate volatility and proposes a model that takes these effects into account. An empirical examination suggests that the inclusion of information about MBS considerably improves model performance in pricing interest-rate options and in forecasting future interest-rate volatility. The empirical results are consistent with the hypothesis that MBS hedging affects both the interest-rate volatility implied by options and the actual interest-rate volatility. The results also indicate that the inclusion of information about the MBS universe may result in models that better describe the price of fixed-income securities.

Keywords: Mortgage-backed securities, interest-rate volatility

JEL Classification: G12, G13, G14, G21

Suggested Citation

Duarte, Jefferson, The Causal Effect of Mortgage Refinancing on Interest-Rate Volatility: Empirical Evidence and Theoretical Implications (November 17, 2005). Available at SSRN: https://ssrn.com/abstract=868524 or http://dx.doi.org/10.2139/ssrn.868524

Jefferson Duarte (Contact Author)

Rice University ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States
713.3486137 (Phone)

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