Mortgage risk and the yield curve

Malkhozov, Aytek, Mueller, Philippe, Vedolin, Andrea and Venter, Gyuri (2016) Mortgage risk and the yield curve. The Review of Financial Studies, 29 (5). pp. 1220-1253. ISSN 0893-9454

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Abstract

We study feedback from the risk of outstanding mortgage-backed securities (MBS) on the level and volatility of interest rates. We incorporate supply shocks resulting from changes in MBS duration into a parsimonious equilibrium dynamic term structure model and derive three predictions that are strongly supported in the data: (1) MBS duration positively predicts nominal and real excess bond returns, especially for longer maturities; (2) the predictive power of MBS duration is transitory in nature; and (3) MBS convexity increases interest rate volatility, and this effect has a hump-shaped term structure.

Item Type:	Article
Official URL:	http://rfs.oxfordjournals.org/
Additional Information:	© 2016 The Authors
Library of Congress subject classification:	H Social Sciences > HG Finance
Journal of Economic Literature Classification System:	E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Determination of Interest Rates; Term Structure of Interest Rates G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
Sets:	Departments > Finance Collections > Economists Online
Projects:	DNRF-102, DFF-4091-00247
Funders:	Institut de Finance Math´ematique de Montreal, LSE Research Committee Seed Fund, Center for Financial Frictions, Danish Council for Independent Research
Date Deposited:	12 Jan 2016 10:38
URL:	http://eprints.lse.ac.uk/64915/

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