Mortgage risk and the yield curve

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

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

JEL-codes: E43 G11 G12 G21 (search for similar items in EconPapers)
Date: 2016-05-01
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Citations: View citations in EconPapers (17)

Published in Review of Financial Studies, 1, May, 2016, 29(5), pp. 1220 - 1253. ISSN: 0893-9454

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http://eprints.lse.ac.uk/64915/ Open access version. (application/pdf)

Related works:
Journal Article: Mortgage Risk and the Yield Curve (2016)
Working Paper: Mortgage risk and the yield curve (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:64915

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