Mortgage Risk and the Yield Curve
Bank for International Settlements
Download Document| Date Published | December 2015 |
| Version | |
| Primary Author | Aytek Malkhozov, Philippe Mueller, Andrea Vedolin and Gyuri Venter |
| Other Authors | |
| Theme | Risk Management of Housing Finance Institutions |
| Country |
Abstract
We study the feedback from the risk of outstanding mortgage-backed securities (MBS) on the level and volatility of interest rates. We incorporate the 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: (i) MBS duration positively predicts nominal and real excess bond returns, especially for longer maturities; (ii) the predictive power of MBS duration is transitory in nature; and (iii) MBS convexity increases interest rate volatility, and this effect has a hump-shaped term structure.