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Author:Song, Zhaogang 

Working Paper
Term Structure of Interest Rates with Short-run and Long-run Risks

Bond returns are time-varying and predictable. What economic forces drive this variation? To answer this long-standing question, we propose a consumption-based model with recursive preferences, long-run risks, and inflation non-neutrality. Our model offers two important insights. First, our model matches well the post-1990 nominal upward-sloping U.S. Treasury yield curve. Second, consistent with our model's implication, variance risk premium based on the U.S. interest rate derivatives data emerges as a strong predictor for short-horizon Treasury excess returns, above and beyond the predictive ...
Finance and Economics Discussion Series , Paper 2015-95

Working Paper
An Empirical Test of Auction Efficiency: Evidence from MBS Auctions of the Federal Reserve

Auction theory has ambiguous implications regarding the relative efficiency of three formats of multiunit auctions: uniform-price, discriminatory-price, and Vickrey auctions. We empirically evaluate the performance of these three auction formats using the bid-level data of the Federal Reserve's purchase auctions of agency mortgage-backed securities (MBS) from June 1, 2014 through November 17, 2014. We estimate marginal cost curves for all dealers, at each auction, based on structural models of the multiunit discriminatory-price auction. Our preliminary results suggest that neither ...
Finance and Economics Discussion Series , Paper 2015-82

Working Paper
A Tale of Two Option Markets: Pricing Kernels and Volatility Risk

Using prices of both S&P 500 options and recently introduced VIX options, we study asset pricing implications of volatility risk. While pointing out the joint pricing kernel is not identified nonparametrically, we propose model-free estimates of marginal pricing kernels of the market return and volatility conditional on the VIX. We find that the pricing kernel of market return exhibits a decreasing pattern given either a high or low VIX level, whereas the unconditional estimates present a U-shape. Hence, stochastic volatility is the key state variable responsible for the U-shape puzzle ...
Finance and Economics Discussion Series , Paper 2014-58

Working Paper
QE Auctions of Treasury Bonds

The Federal Reserve (Fed) uses a unique auction mechanism to purchase U.S. Treasury securities in implementing its quantitative easing (QE) policy. In this paper, we study the outcomes of QE auctions and participating dealers' bidding behaviors from November 2010 to September 2011, during which the Fed purchased $780 billion Treasury securities. Our data include the transaction prices and quantities of each traded bond in each auction, as well as dealers' identities. We find that: (1) In QE auctions the Fed tends to exclude bonds that are liquid and on special, but among included bonds, ...
Finance and Economics Discussion Series , Paper 2014-48

Cash-Forward Arbitrage and Dealer Capital in MBS Markets: COVID-19 and Beyond ves

We examine the economic mechanisms that limited arbitrage between the cash and forward markets of agency MBS, and whether asset purchases of the Federal Reserve (Fed) alleviated price dislocations. We find that the cash-forward basis, or the price difference between the cash and forward markets of agency MBS controlling for differences in fundamentals, widened significantly—by $0.9 per $100 face value during the height of the COVID-19 crisis. The widening basis was accompanied by a significant increase in selling by customers in the cash market, indicating a “scramble for cash” ...
Staff Reports , Paper 933

Discussion Paper
MBS Market Dysfunctions in the Time of COVID-19

The COVID-19 pandemic elevated financial market illiquidity and volatility, especially in March 2020. The mortgage-backed securities (MBS) market, which plays a critical role in the housing market by funding the vast majority of U.S. residential mortgages, also suffered a period of dysfunction. In this post, we study a particular aspect of MBS market disruptions by showing how a long-standing relationship between cash and forward markets broke down, in spite of MBS dealers increasing the provision of liquidity. (See our related staff report for greater detail.) We also highlight an innovative ...
Liberty Street Economics , Paper 20200717

Asset Pricing with Cohort-Based Trading in MBS Markets

Agency mortgage-backed securities (MBS) with diverse characteristics are traded in parallel with individualized contracts in the specified pool (SP) market and with standardized contracts in the to-be-announced (TBA) market. We find that this unique parallel trading environment substantially affects MBS returns: (1) Greater heterogeneity in MBS values increases the yields of all MBS because it exacerbates the cheapest-to-deliver concerns for TBA buyers and reduces the value of the TBA market as a backup selling venue for SP buyers; (2) high selling pressure amplifies the impact of MBS ...
Staff Reports , Paper 931


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