The cross section of MBS returns

Diep, P, Eisfelt, A and Richardson, S A (2021) The cross section of MBS returns. Journal of Finance, 76 (5). pp. 2093-2151. ISSN 0022-1082 OPEN ACCESS


We present a simple, linear asset pricing model of the cross section of Mortgage-Backed Security (MBS) returns. MBS earn risk premia as compensation for their exposure to prepayment risk. We measure prepayment risk and estimate security risk loadings using real data on prepayment forecasts vs. realizations. Estimated loadings on prepayment risk are monotonically decreasing in securities’ coupons relative to the par coupon, as predicted by the fundamental effect of prepayment on the value of bonds trading above and below par. Prepayment risks appear to be priced by specialized MBS investors. In particular, we find convincing evidence that prepayment risk prices change sign over time with the sign of a representative MBS investor’s exposure to prepayment risk.

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Item Type: Article
Subject Areas: Accounting
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© 2020 American Finance Association. This is the peer reviewed version of the following article: Diep P; Eisfelt A; Richardson S: 'The cross section of MBS returns', Journal of Finance which will be published in final form at (awaiting publisher to confirm DOI). This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions.

Date Deposited: 05 Nov 2020 12:49
Date of first compliant deposit: 30 Jun 2021
Subjects: Investment appraisal
Rate of return
Financial risk
Last Modified: 29 May 2024 01:53

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