Mortgage Risk and the Yield Curve ∗

@inproceedings{Malkhozov2015MortgageRA,
  title={Mortgage Risk and the Yield Curve ∗},
  author={Aytek Malkhozov and P. M{\"u}ller and Andrea Vedolin and Gyuri Venter},
  year={2015}
}
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… CONTINUE READING

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