Authors: Nicola Fusari, Wei Li, Haoyang Liu, and Zhaogang Song
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Staff Reports
Asset Pricing with Cohort-Based Trading in MBS Markets
Number 931
July 2020 Revised October 2021
July 2020 Revised October 2021
JEL classification: E58, G12, G18, G21
Agency MBSs with diverse characteristics are traded in parallel through individualized specified pool (SP) contracts and standardized to-be-announced (TBA) contracts with delivery flexibility. This parallel trading environment generates distinctive effects on MBS pricing and trading: (1) Although cheapest-to-deliver (CTD) issues are present in TBA trading and absent from SP trading by design, MBS heterogeneity associated with CTD discounts affects SP yields positively, with the effect stronger for lower-value SPs; (2) high selling pressure amplifies the effects of MBS heterogeneity on SP yields; (3) greater MBS heterogeneity dampens SP and TBA trading activities but increases their ratio.
Author Disclosure Statement(s)
Nicola Fusari
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Wei Li
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.
Haoyang Liu
The author (Haoyang Liu) declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Zhaogang Song
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Wei Li
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.
Haoyang Liu
The author (Haoyang Liu) declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Zhaogang Song
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.
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