Journal of Finance Vol. 77 No. 6 2022

Asset Pricing with Cohort‐Based Trading in MBS Markets

Nicola Fusari^1,2; Wei Li^1,2; Haoyang Liu^1,2; Zhaogang Song^3,1,4,2

¹ William Carey University · ² Federal Reserve Bank of New York · ³ Johns Hopkins University · ⁴ Johns Hopkins Medicine

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.

DOI

10.1111/jofi.13180

Volume

77

Issue

6

Pages

3249-3287

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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