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Asset Pricing with Cohort‐Based Trading in MBS Markets

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  • NICOLA FUSARI
  • WEI LI
  • HAOYANG LIU
  • ZHAOGANG SONG

Abstract

Agency mortgage‐backed securities (MBSs) with diverse characteristics are traded in parallel through individualized specified pool (SP) contracts and standardized to‐be‐announced (TBA) contracts with delivery flexibility. This parallel trading environment generates distinctive effects on MBS pricing and trading: (i) 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 yields positively, with the effect stronger for lower‐value SPs; (ii) high selling pressure amplifies the effects of MBS heterogeneity on SP yields; and (iii) greater MBS heterogeneity dampens SP and TBA trading activities but increases their ratio.

Suggested Citation

  • Nicola Fusari & Wei Li & Haoyang Liu & Zhaogang Song, 2022. "Asset Pricing with Cohort‐Based Trading in MBS Markets," Journal of Finance, American Finance Association, vol. 77(6), pages 3249-3287, December.
    • Handle: RePEc:bla:jfinan:v:77:y:2022:i:6:p:3249-3287
    DOI: 10.1111/jofi.13180
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    References listed on IDEAS

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