Does mortgage hedging amplify movements in long-term interest rates?
AbstractThe 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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Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2003-49.
Date of creation: 2003
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-10-28 (All new papers)
- NEP-FIN-2003-10-28 (Finance)
- NEP-MAC-2003-10-28 (Macroeconomics)
- NEP-MON-2003-10-28 (Monetary Economics)
- NEP-RMG-2003-10-28 (Risk Management)
- NEP-URE-2003-10-28 (Urban & Real Estate Economics)
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