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Mortgage risk and the yield curve

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

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Identification Number: 10.1093/rfs/hhw003

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
Divisions: Finance
Subjects: H Social Sciences > HG Finance
JEL classification: 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
Date Deposited: 12 Jan 2016 10:38
Last Modified: 20 Nov 2019 11:35
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
URI: http://eprints.lse.ac.uk/id/eprint/64915

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