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

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Author Info
Roberto Perli
Brian Sack

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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.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2003-49.

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Date of creation: 2003
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Handle: RePEc:fip:fedgfe:2003-49

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Related research
Keywords: Mortgages ; Mortgage loans;

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Julia Fernald & Patricia C. Mosser & Frank Keane, 1994. "Mortgage security hedging and the yield curve," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 92-100.
  2. Dwight Jaffee, 2003. "The Interest Rate Risk of Fannie Mae and Freddie Mac," Journal of Financial Services Research, Springer, vol. 24(1), pages 5-29, August. [Downloadable!] (restricted)
  3. John Kambhu & Patricia C. Mosser, 2001. "The effect of interest rate options hedging on term-structure dynamics," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 51-70. [Downloadable!]
  4. Julia Fernald & Patricia C. Mosser & Frank Keane, 1994. "Mortgage security hedging and the yield curve," Research Paper 9411, Federal Reserve Bank of New York.
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Robert A. Eisenbeis & W. Scott Frame & Larry D. Wall, 2006. "An analysis of the systemic risks posed by Fannie Mae and Freddie Mac and an evaluation of the policy options for reducing those risks," Working Paper 2006-02, Federal Reserve Bank of Atlanta. [Downloadable!]
    Other versions:
  2. Sergey V. Chernenko, 2004. "The information content of forward and futures prices: market expectations and the price of risk," International Finance Discussion Papers 808, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  3. John M. Quigley, 2006. "Federal credit and insurance programs: housing," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 281-310. [Downloadable!]
    Other versions:
  4. Lawrence White & W. Scott Frame, 2004. "Fussing and Fuming over Fannie and Freddie: How Much Smoke, How Much Fire?," Working Papers 04-27, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
  5. Angela Maddaloni & Darren Pain, 2004. "Corporate ‘excesses’ and financial market dynamics," Occasional Paper Series 17, European Central Bank. [Downloadable!]
  6. Andreas Lehnert & Wayne Passmore & Shane Sherlund, 2008. "GSEs, Mortgage Rates, and Secondary Market Activities," The Journal of Real Estate Finance and Economics, Springer, vol. 36(3), pages 343-363, April. [Downloadable!] (restricted)
    Other versions:
  7. W. Scott Frame & Lawrence J. White, 2004. "Fussing and fuming over Fannie and Freddie: how much smoke, how much fire?," Working Paper 2004-26, Federal Reserve Bank of Atlanta. [Downloadable!]
  8. Robert A. Eisenbeis & W. Scott Frame & Larry D. Wall, 2004. "Resolving large financial intermediaries: banks versus housing enterprises," Working Paper 2004-23, Federal Reserve Bank of Atlanta. [Downloadable!]
    Other versions:
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