Mortgage Risk and the Yield Curve

Aytek Malkhozov, Philippe Mueller, Andrea Vedolin, Gyuri Venter

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Abstract

We study feedback from the risk of outstanding mortgage-backed securities (MBS) on the level and volatility of interest rates. We incorporate supply shocks resulting from changes in MBS duration into a parsimonious equilibrium dynamic term structure model and derive three predictions that are strongly supported in the data: (1) MBS duration positively predicts nominal and real excess bond returns, especially for longer maturities; (2) the predictive power of MBS duration is transitory in nature; and (3) MBS convexity increases interest rate volatility, and this effect has a hump-shaped term structure.
Original languageEnglish
JournalThe Review of Financial Studies
Volume29
Issue number5
Pages (from-to)1220-1253
Number of pages34
ISSN0893-9454
DOIs
Publication statusPublished - 2016

Cite this

Malkhozov, A., Mueller, P., Vedolin, A., & Venter, G. (2016). Mortgage Risk and the Yield Curve. The Review of Financial Studies, 29(5), 1220-1253. https://doi.org/10.1093/rfs/hhw003