Report

Asset Pricing with Cohort-Based Trading in MBS Markets


Abstract: Agency MBSs with diverse characteristics are traded in parallel through individualized specified pool (SP) contracts and standardized to-be-announced (TBA) contracts. This parallel trading environment generates distinctive effects on MBS pricing and trading: (1) 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 returns positively, with the effect stronger for lower-value SPs; (2) High selling pressure amplifies the effects of MBS heterogeneity on SP returns; (3) Greater MBS heterogeneity dampens SP and TBA trading activities but increases their ratio.

Keywords: cohort; heterogeneity; liquidity; MBS; prepayment; TBA;

JEL Classification: E58; G12; G18; G21;

Access Documents

File(s): File format is application/pdf https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr931.pdf
Description: Full text

File(s): File format is text/html https://www.newyorkfed.org/research/staff_reports/sr931.html
Description: Summary

Authors

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2020-07-01

Number: 931

Note: Revised July 2021.