Advanced Search
MyIDEAS: Login to save this paper or follow this series

Mortgage Hedging in Fixed Income Markets

Contents:

Author Info

  • Aytek Malkhozov
  • Philippe Mueller
  • Andrea Vedolin
  • Gyuri Venter

Abstract

We study the feedback from hedging mortgage portfolios on the level and volatility of interest rates. We incorporate the supply shocks resulting from hedging into an otherwise standard dynamic term structure model, and derive two sets of predictions which are strongly supported by the data: First, the duration of mortgage-backed securities (MBS) positively predicts excess bond returns, especially for longer maturities. Second, MBS convexity increases yield and swaption implied volatilities, and this effect has a hump-shaped term structure. Empirically, neither duration, nor convexity are spanned by yield factors. A calibrated version of our model replicates salient features of first and second moments of bond yields

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.lse.ac.uk/fmg/researchProgrammes/paulWoolleyCentre/workingPapers/dp722-PWC37.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp722.

as in new window
Length:
Date of creation: 2013
Date of revision:
Handle: RePEc:fmg:fmgdps:dp722

Contact details of provider:
Web page: http://www.lse.ac.uk/fmg/

Related research

Keywords:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
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.:
as in new window
  1. Acharya, Viral V. & Lochstoer, Lars & Ramadorai, Tarun, 2009. "Limits to Arbitrage and Hedging: Evidence from Commodity Markets," CEPR Discussion Papers 7327, C.E.P.R. Discussion Papers.
  2. Sydeny C. Ludvigson & Serena Ng, 2005. "Macro Factors in Bond Risk Premia," NBER Working Papers 11703, National Bureau of Economic Research, Inc.
  3. Jean-Sébastien Fontaine & René Garcia, 2012. "Bond Liquidity Premia," Review of Financial Studies, Society for Financial Studies, vol. 25(4), pages 1207-1254.
  4. Daniel O. Beltran & Maxwell Kretchmer & Jaime Marquez & Charles P. Thomas, 2012. "Foreign holdings of U.S. Treasuries and U.S. Treasury yields," International Finance Discussion Papers 1041, Board of Governors of the Federal Reserve System (U.S.).
  5. Wei Xiong & Hongjun Yan, 2010. "Heterogeneous Expectations and Bond Markets," Review of Financial Studies, Society for Financial Studies, vol. 23(4), pages 1433-1466, April.
  6. Xavier Gabaix & Arvind Krishnamurthy & Olivier Vigneron, 2005. "Limits of Arbitrage: Theory and Evidence from the Mortgage-Backed Securities Market," NBER Working Papers 11851, National Bureau of Economic Research, Inc.
  7. Wright, Jonathan H. & Zhou, Hao, 2009. "Bond risk premia and realized jump risk," Journal of Banking & Finance, Elsevier, vol. 33(12), pages 2333-2345, December.
  8. 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.
  9. Boudoukh, Jacob, et al, 1997. "Pricing Mortgage-Backed Securities in a Multifactor Interest Rate Environment: A Multivariate Density Estimation Approach," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 405-46.
  10. David F. Schrager & Antoon A. J. Pelsser, 2006. "Pricing Swaptions And Coupon Bond Options In Affine Term Structure Models," Mathematical Finance, Wiley Blackwell, vol. 16(4), pages 673-694.
  11. Schwartz, Eduardo S & Torous, Walter N, 1989. " Prepayment and the Valuation of Mortgage-Backed Securities," Journal of Finance, American Finance Association, vol. 44(2), pages 375-92, June.
  12. Francis A. Longstaff, 2005. "Borrower Credit and the Valuation of Mortgage-Backed Securities," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 33(4), pages 619-661, December.
  13. Dybvig, Philip H & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1996. "Long Forward and Zero-Coupon Rates Can Never Fall," The Journal of Business, University of Chicago Press, vol. 69(1), pages 1-25, January.
  14. Sumit Agarwal & John C. Driscoll & David Laibson, 2007. "Optimal Mortgage Refinancing: A Closed Form Solution," NBER Working Papers 13487, National Bureau of Economic Research, Inc.
  15. Feldhütter, Peter & Lando, David, 2008. "Decomposing swap spreads," Journal of Financial Economics, Elsevier, vol. 88(2), pages 375-405, May.
  16. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(04), pages 627-627, November.
  17. Nikolai Roussanov & Michael Michaux & Hui Chen, 2011. "Houses as ATMs? Mortgage Refinancing and Macroeconomic Uncertainty," 2011 Meeting Papers 1369, Society for Economic Dynamics.
  18. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
  19. Philippe Mueller & Andrea Vedolin & Yu-min Yen, 2012. "Bond Variance Risk Premia," FMG Discussion Papers dp699, Financial Markets Group.
  20. Stanton, Richard, 1995. "Rational Prepayment and the Valuation Mortgage-Backed Securities," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 677-708.
  21. Pierre Collin-Dufresne & Robert S. Goldstein, 2002. "Do Bonds Span the Fixed Income Markets? Theory and Evidence for Unspanned Stochastic Volatility," Journal of Finance, American Finance Association, vol. 57(4), pages 1685-1730, 08.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:fmg:fmgdps:dp722. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (The FMG Administration).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.