Journal of Financial Economics Vol. 150 No. 1 2023
Cheapest-to-deliver pricing, optimal MBS securitization, and welfare implications
Abstract
We study optimal securitization in the agency mortgage-backed securities (MBS) market. Many MBS are traded in the liquid to-be-announced (TBA) market, which however induces adverse selection due to cheapest-to-deliver pricing . We find that lenders pool high-value loans separately and trade them in a less liquid market. We estimate a model of MBS pooling and trading to study welfare implications of pooling policies. TBA market structure produces a trade-off between efficiency and equity; broader pooling increases liquidity and average welfare, but results in a larger cross-subsidy from smaller loans to larger loans. Minimizing costs or limiting strategic pooling results in a more regressive redistribution.
- DOI
- 10.1016/j.jfineco.2023.07.001
- Volume
- 150
- Issue
- 1
- Pages
- 68-93
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref