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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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    Cited by:

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    3. Garcia-Villegas, Salomon, 2023. "The amplification effects of adverse selection in mortgage credit supply," Journal of Housing Economics, Elsevier, vol. 62(C).

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    More about this item

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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