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

Gao, Pengjie; Schultz, Paul; Song, Zhaogang

doi:10.1111/jofi.12496

Cited by 41 publications

(24 citation statements)

References 12 publications

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“…The TBA market is used by banks and other intermediaries to hedge mortgages that they originate and by investors that buy and sell already-issued MBS. Gao, Schultz, and Song (2017) report that the average dealer-to-customer transaction size of outright TBA trades during their May 2011 to Apr. 2013 sample period is $32.6 million, and about 37% of trades between dealers and customers exceeds $10 million.…”

Section: B Structured Bondsmentioning

confidence: 99%

“…14 The study also finds that dealer-to-customer trades represent almost 80% of trading volume for individual structured bonds, compared to 52% for the TBA market. Gao et al (2017) attribute the high percentage of TBA interdealer trades to hedging activities of dealers, who also hold positions in the SPs that are eligible for TBA delivery.…”

Section: B Structured Bondsmentioning

confidence: 99%

“…Friewald, Jankowitsch, and Subrahmanyam (2012) report that trading costs for structured bonds are lower if they are traded in institutional size, are issued by a federal authority, or have low credit risk. Vickery and Wright (2013) and Gao et al (2017) find that mortgage bonds that are eligible for delivery in the TBA market are cheaper to trade than TBA-ineligible mortgage bonds, reflecting that the TBA market allows dealers to effectively hedge TBA-eligible MBS positions. Schultz (2001) relies on the NAIC database to report the first large-sample estimates of corporate bond trading costs, documenting that average trading costs are large as compared to equities, and that costs for large institutional trades exceed those that are small.…”

Section: Estimates Of Trading Costs In Bond Marketsmentioning

confidence: 99%

See 2 more Smart Citations

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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Section: B Structured Bondsmentioning

confidence: 99%

Section: B Structured Bondsmentioning

confidence: 99%

Section: Estimates Of Trading Costs In Bond Marketsmentioning

confidence: 99%

See 1 more Smart Citation

A Survey of the Microstructure of Fixed-Income Markets

Bessembinder¹,

Spatt

Venkataraman

2019

J. Financ. Quant. Anal.

103

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“…Yuan (2005) shows that the presence of benchmarks gives rise to liquidity in related markets. 3 2 Gao et al (2017) describe how, in that market, dealers typically hedge inventory risk in their Specific-Pool exposures with offsetting TBA trades and they show that impediments to hedging can reduce such liquidity. More interestingly, they conclude that the presence of TBA markets has very widespread beneficial effects on liquidity significantly beyond the mortgage pools that are cheapest to deliver.…”

Section: Introductionmentioning

confidence: 99%

Positive Liquidity Spillovers from Sovereign Bond-Backed Securities

Dunne

2019

JRFM

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This paper contributes to the debate concerning the benefits and disadvantages of introducing a European Sovereign Bond-Backed Securitisation (SBBS) to address the need for a common safe asset that would break destabilising bank-sovereign linkages. The analysis focuses on assessing the effectiveness of hedges incurred while making markets in individual euro area sovereign bonds by taking offsetting positions in one or more of the SBBS tranches. Tranche yields are estimated using a simulation approach. This involves the generation of sovereign defaults and allocation of the combined credit risk premium of all the sovereigns, at the end of each day, to the SBBS tranches according to the seniority of claims under the proposed securitisation. Optimal hedging with SBBS is found to reduce risk exposures substantially in normal market conditions. In volatile conditions, hedging is not very effective but leaves dealers exposed to mostly idiosyncratic risks. These remaining risks largely disappear if dealers are diversified in providing liquidity across country-specific secondary markets and SBBS tranches. Hedging each of the long positions in a portfolio of individual sovereigns results in a risk exposure as low as that borne by holding the safest individual sovereign bond (the Bund).

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“…9 Data source is the TRACE database from FINRA. Because securities change from day to day, we smooth the data by taking the monthly average MBS price in the TBA market.10 See Vickery and Wright (2013) andGao, Schultz and Song (2017) for a thorough discussion of the TBA market.…”

mentioning

confidence: 99%