Mortgage Risk and the Yield Curve

Aytek Malkhozov, Philippe Mueller (), Andrea Vedolin and Gyuri Venter

The Review of Financial Studies, 2016, vol. 29, issue 5, 1220-1253

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. Received November 10, 2014; accepted December 8, 2015 by Editor Robin Greenwood.

Date: 2016
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Working Paper: Mortgage risk and the yield curve (2016)
Working Paper: Mortgage risk and the yield curve (2015)
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