Does mortgage hedging amplify movements in long-term interest rates?

Roberto Perli and Brian P. Sack

No 2003-49, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: The growth of the mortgage market in recent years has raised the question of what effects, if any, the hedging of mortgage portfolios has on the behavior of long-term interest rates. This paper finds that the volatility of the ten-year swap rate implied by swaptions increases when the prepayment risk of outstanding mortgages increases--most likely because investors expect the hedging of prepayment risk to amplify future interest rate movements. These amplification effects can be considerable in magnitude, but they are generally expected to persist only for several months.

Keywords: Mortgages; Mortgage loans (search for similar items in EconPapers)
Date: 2003
New Economics Papers: this item is included in nep-fin, nep-mac, nep-mon, nep-rmg and nep-ure
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Citations: View citations in EconPapers (31)

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