Liquidity and Value in the Deep vs. Shallow Ends of Mortgage-Backed Securities Pools

Atanasov, Vladimir A.; Merrick, John J.

doi:10.2139/ssrn.2082163

Cited by 10 publications

(11 citation statements)

References 22 publications

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“…These indicative quotes are updated continuously as dealers update their quotes. Atanasov and Merrick (, p. 1) observe that the TBA market “… has excellent pre‐trade transparency via electronic platforms.” Vickery and Wright () observe that internal Federal Reserve analysis shows that quotes generally track prices of completed transactions closely.…”

Section: How the Market For Agency Mbs Workmentioning

confidence: 99%

“…To date, a handful of studies of the microstructure of MBS markets have been conducted. Estimates of MBS trading costs appear in Atanasov and Merrick (), Bessembinder, Maxwell, and Venkataraman (), and Friewald, Jankowitsch, and Subrahmanyam (). The approach of Bessembinder, Maxwell, and Venkataraman most closely resembles ours.…”

Section: Sp and Tba Trading Costsmentioning

confidence: 99%

“…SP trades, in contrast, may be settled on any day during the month. Atanasov and Merrick () note that many dealers choose to settle SP trades on TBA settlement dates for convenience, but unlike dollar rolls and other TBA trades, SP trades almost always lead to delivery. Hence, the monthly settlement dates and the corresponding trades to avoid delivery that are so important in the TBA market are unimportant for SP trades.…”

Section: The Impact Of Tba Trading On Sp Liquiditymentioning

confidence: 99%

“…As part of their study, they find that trading costs are much lower for TBA trades than SP trades. Atanasov and Merrick () examine the integration of TBA and SP markets, and show that for large trades the two markets are well integrated. Like the others, they find that SP trading costs are much higher than TBA costs.…”

mentioning

confidence: 99%

“…Atanasov and Merrick (, p. 6) observe that SP traders should regard the TBA market “…as an extremely liquid backstop, which ensures a price floor equal to the current price of the corresponding standardized TBA contract.”…”

mentioning

confidence: 99%

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Liquidity in a Market for Unique Assets: Specified Pool and To‐Be‐Announced Trading in the Mortgage‐Backed Securities Market

Gao¹,

Schultz²,

Song³

2017

The Journal of Finance

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Agency mortgage-backed securities (MBS) trade simultaneously in a market for specified pools (SPs) and in the to-be-announced (TBA) forward market. TBA trading creates liquidity by allowing thousands of different MBS to be traded in a handful of TBA contracts. SPs that are eligible to be traded as TBAs have significantly lower trading costs than other SPs. We present evidence that TBA eligibility, in addition to characteristics of TBA-eligible SPs, lowers trading costs. We show that dealers hedge SP inventory with TBA trades, and they are more likely to prearrange trades in SPs that are difficult to hedge. THE MARKET FOR AGENCY MORTGAGE-BACKED securities (MBS) is among the largest, most active, and most liquid of all securities markets. At first glance, the market's liquidity is surprising because each MBS is unique and is composed of specific mortgages with their own prepayment characteristics. In this paper, we study the institutional feature of this market that allows it to work so well, namely, parallel trading in a to-be-announced (TBA) forward market in MBS and a specified pool (SP) market in which specific MBS are traded.TBA trading makes the agency MBS market liquid in three ways. First, the TBA market takes thin markets for thousands of different MBS with different prepayment characteristics and trades them through a handful of thickly traded cheapest-to-deliver contracts. In this way, liquidity is increased for the MBS that are traded there instead of as SPs. Second, eligibility for TBA

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Section: How the Market For Agency Mbs Workmentioning

confidence: 99%

Section: Sp and Tba Trading Costsmentioning

confidence: 99%

Section: The Impact Of Tba Trading On Sp Liquiditymentioning

confidence: 99%

mentioning

confidence: 99%

mentioning

confidence: 99%

See 3 more Smart Citations

Liquidity in a Market for Unique Assets: Specified Pool and To‐Be‐Announced Trading in the Mortgage‐Backed Securities Market

Gao¹,

Schultz²,

Song³

2017

The Journal of Finance

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A Survey of the Microstructure of Fixed-Income Markets

Bessembinder¹,

Spatt

Venkataraman

2019

J. Financ. Quant. Anal.

103

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In this article, we survey the literature that studies fixed-income trading rules and outcomes, including Treasury securities, corporate and municipal bonds, and structured credit products. We compare and contrast the microstructure and regulation of fixed-income markets with equity markets. We highlight the nature of over-the-counter trading in the face of search costs and the associated slow evolution of electronically facilitated intermediation. We discuss the databases available to study fixed-income microstructure, as well as measures and determinants of trading costs, and the important roles dealer networks and limited transparency play. We also highlight unresolved issues.

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Bid-Ask Spreads, Trading Networks, and the Pricing of Securitizations

Hollifield

Neklyudov

Spatt

2017

The Review of Financial Studies

138

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Liquidity and Value in the Deep vs. Shallow Ends of Mortgage-Backed Securities Pools

Abstract: for helpful comments and suggestions. The opinions, findings, conclusions, and recommendations expressed herein are those of the authors and do not necessarily reflect those of FINRA. The authors are solely responsible for any remaining errors.

Cited by 10 publications

References 22 publications

Liquidity in a Market for Unique Assets: Specified Pool and To‐Be‐Announced Trading in the Mortgage‐Backed Securities Market

Liquidity in a Market for Unique Assets: Specified Pool and To‐Be‐Announced Trading in the Mortgage‐Backed Securities Market

A Survey of the Microstructure of Fixed-Income Markets

Bid-Ask Spreads, Trading Networks, and the Pricing of Securitizations

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