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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 ...
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” ...