Journal of Finance Vol. 76 No. 5 2021

The Cross Section of MBS Returns

PETER DIEP^1,2; Andrea L. Eisfeldt³; Scott A. Richardson^1,2

¹ Federal Reserve Bank of New York · ² The University of Texas at Austin · ³ University of California, Los Angeles

Abstract

We present a simple, linear asset pricing model of the cross section of Mortgage‐Backed Security (MBS) returns. MBS earn risk premia as compensation for their exposure to prepayment risk. We measure prepayment risk and estimate risk loadings using prepayment forecasts versus realizations. Estimated loadings on prepayment risk decrease monotonically in securities' coupons relative to the par coupon, consistent with the predicted effect of prepayment on bond value. Prepayment risk appears to be priced by specialized MBS investors. The price of prepayment risk changes sign over time with the sign of a representative MBS investor's exposure to prepayment shocks.

DOI

10.1111/jofi.13055

Volume

76

Issue

5

Pages

2093-2151

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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