Mortgage Risk and the Yield Curve

Malkhozov, Aytek; Mueller, Philippe; Vedolin, Andrea; Venter, Gyuri

doi:10.1093/rfs/hhw003

Cited by 63 publications

(31 citation statements)

References 43 publications

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“…Holding equity valuations and other control variables constant, net equity repurchases decrease when government bond issuance increases, and so does net corporate debt issuance. 21 In Table IA16 of the Internet Appendix, I also study higher frequency supply shocks, such as changes in the supply of interest rate risks induced by variation in Mortgage-backed securities (MBS) duration (Hanson (2014), Malkhozov et al (2016)). As these shocks have a transitory impact that dissipates within a few months, firms are not nimble enough to actively exploit such transitory supply shocks, and I do not find evidence of cross-market corporate arbitrage.…”

Section: B Impact Of Market-specific Supply Shocksmentioning

confidence: 99%

Nonfinancial Firms as Cross‐Market Arbitrageurs

2019

The Journal of Finance

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I demonstrate that nonfinancial corporations act as cross‐market arbitrageurs in their own securities. Firms use one type of security to replace another in response to shifts in relative valuations, inducing negatively correlated financing flows in different markets. Net equity repurchases and net debt issuance both increase when expected excess returns on debt are particularly low, or when expected excess returns on equity are relatively high. Credit valuations affect equity financing as much as equity valuations do, and vice versa. Cross‐market corporate arbitrage is most prevalent among large, unconstrained firms, and helps account for aggregate financing patterns.

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Section: B Impact Of Market-specific Supply Shocksmentioning

confidence: 99%

Nonfinancial Firms as Cross‐Market Arbitrageurs

2019

The Journal of Finance

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“…In particular, we control for the market, size (SMB), book-to-market (HML), and momentum (MOM) portfolios. We also include two liquidity factors for bond and equity markets: The liquidity factor extracted from bonds used in Malkhozov, Mueller, Vedolin, and Venter (2016a) and the Pástor and Stambaugh (2003) equity liquidity factor. In order to make the two measures comparable, we multiply the latter by minus one to get an illiquidity measure.…”

Section: Risk-adjusted Returnsmentioning

confidence: 99%

“…For the S&P500 futures strategies we use the excess return on the value-weighted return of all CRSP firms. The illiquidity measure for the bond market is taken from Malkhozov, Mueller, Vedolin, and Venter (2016a) and for the equity market we use the negative of the Pástor and Stambaugh (2003) liquidity factor such that a high value again measures illiquidity. The first column reports Jensen's alpha together with its t-statistic in parentheses.…”

Section: Summary Statistics Option Trading Strategiesmentioning

confidence: 99%

Bond Variance Risk Premiums*

2017

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“…In these models, investors' need to hedge MBS convexity risk may explain significant variation in interest rate volatility and excess returns on Treasuries (Duarte, 2008;Hanson, 2014;Malkhozov et al, 2013;Perli and Sack, 2003). Our analysis is complementary to this work as we focus on MBS specific risks as well as how they respond to changes in other fixed income markets.…”

Section: Related Literaturementioning

confidence: 99%

Understanding Mortgage Spreads

2014

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractSpreads of agency mortgage-backed securities (MBS) vary significantly in the cross section and over time, but the sources of this variation are not well understood. We document that, in the cross section, MBS spreads adjusted for the prepayment option show a pronounced smile with respect to the MBS coupon. We propose prepayment model risk as a candidate driver of MBS spreads and present a new pricing model that uses "stripped" MBS prices to identify the contribution of this risk to option-adjusted spreads. With this pricing model, we find that prepayment model risk explains the smile, while the variation in the time series is mostly accounted for by a non-prepayment-risk component, which is related to credit risk in fixedincome markets and MBS supply. Finally, we study the MBS market response to the Fed's largescale asset purchases and show that the model is consistent with spread movements following the initial announcement and, in particular, the fanning out of option-adjusted spreads across different coupons.

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Mortgage Risk and the Yield Curve

Cited by 63 publications

References 43 publications

Nonfinancial Firms as Cross‐Market Arbitrageurs

Nonfinancial Firms as Cross‐Market Arbitrageurs

Bond Variance Risk Premiums*

Understanding Mortgage Spreads

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