Mortgage risk and the yield curve

Aytek Malkhozov, Philippe Mueller (philippe.mueller@wbs.ac.uk), Andrea Vedolin and Gyuri Venter

No 532, BIS Working Papers from Bank for International Settlements

Abstract: We study the feedback from the risk of outstanding mortgage-backed securities (MBS) on the level and volatility of interest rates. We incorporate the 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: (i) MBS duration positively predicts nominal and real excess bond returns, especially for longer maturities; (ii) the predictive power of MBS duration is transitory in nature; and (iii) MBS convexity increases interest rate volatility, and this effect has a hump-shaped term structure.

Keywords: Term structure of interest rates; MBS; supply factor (search for similar items in EconPapers)
Pages: 53 pages
Date: 2015-12
New Economics Papers: this item is included in nep-ure
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Citations: View citations in EconPapers (17)

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Related works:
Journal Article: Mortgage Risk and the Yield Curve (2016)
Working Paper: Mortgage risk and the yield curve (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:532

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