Asset Pricing with Cohort-Based Trading in MBS Markets

Nicola Fusari (), Wei Li, Haoyang Liu () and Zhaogang Song

No 931, Staff Reports from Federal Reserve Bank of New York

Abstract: Agency MBSs with diverse characteristics are traded in parallel through individualized specified pool (SP) contracts and standardized to-be-announced (TBA) contracts. This parallel trading environment generates distinctive effects on MBS pricing and trading: (1) Although cheapest-to-deliver (CTD) issues are present in TBA trading and absent from SP trading by design, MBS heterogeneity associated with CTD discounts affects SP returns positively, with the effect stronger for lower-value SPs; (2) High selling pressure amplifies the effects of MBS heterogeneity on SP returns; (3) Greater MBS heterogeneity dampens SP and TBA trading activities but increases their ratio.

Keywords: cohort; heterogeneity; liquidity; MBS; prepayment; TBA (search for similar items in EconPapers)
JEL-codes: E58 G12 G18 G21 (search for similar items in EconPapers)
Pages: 67
Date: 2020-07-01
New Economics Papers: this item is included in nep-mac, nep-mst and nep-ure
Note: Revised July 2021.
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Citations: View citations in EconPapers (2)

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Journal Article: Asset Pricing with Cohort‐Based Trading in MBS Markets (2022)
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