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Macroeconomic-Driven Prepayment Risk and the Valuation of Mortgage-Backed Securities.
- Source :
- Review of Financial Studies; Mar2018, Vol. 31 Issue 3, p1132-1183, 52p
- Publication Year :
- 2018
-
Abstract
- We develop a three-factor no-arbitrage model for valuing mortgage-backed securities in which we solve for the implied prepayment function from the cross-section of market prices. This model closely fits the cross-section of mortgage-backed security prices without needing to specify an econometric prepayment model. We find that implied prepayments are generally higher than actual prepayments, providing direct evidence of significant macroeconomic-driven prepayment risk premiums in mortgage-backed security prices. We also find evidence that mortgage-backed security prices were significantly affected by Fannie Mae credit risk and the Federal Reserve's quantitative easing programs. [ABSTRACT FROM AUTHOR]
Details
- Language :
- English
- ISSN :
- 08939454
- Volume :
- 31
- Issue :
- 3
- Database :
- Complementary Index
- Journal :
- Review of Financial Studies
- Publication Type :
- Academic Journal
- Accession number :
- 127952290
- Full Text :
- https://doi.org/10.1093/rfs/hhx140