Mortgage Risk and the Yield Curve

Aytek Malkhozov; Philippe Mueller; Andrea Vedolin; Gyuri Venter

doi:10.1093/rfs/hhw003

Mortgage Risk and the Yield Curve

Aytek Malkhozov¹; Philippe Mueller²; Andrea Vedolin²; Gyuri Venter³

¹ Bank for International Settlements · ² London School of Economics and Political Science · ³ Copenhagen Business School

Review of Financial Studies 2016 open access

We study feedback from the risk of outstanding mortgage-backed securities (MBS) on the level and volatility of interest rates. We incorporate supply shocks resulting from changes in MBS duration into a parsimonious equilibrium dynamic term structure model and derive three predictions that are strongly supported in the data: (1) MBS duration positively predicts nominal and real excess bond returns, especially for longer maturities; (2) the predictive power of MBS duration is transitory in nature; and (3) MBS convexity increases interest rate volatility, and this effect has a hump-shaped term structure.

DOI: 10.1093/rfs/hhw003
Volume: 29 (5)
Pages: 1220-1253
Language: en
Export: BibTeX
Sources: openalex crossref