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  • September 8, 2014: IAQF/Thalesians Seminar Series

September 8, 2014: IAQF/Thalesians Seminar Series

  • 08 Sep 2014
  • 5:45 PM (EDT)
  • NYU Kimmel Center, Room 914, 60 Washington Square South, New York, NY

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Understanding Mortgage Spreads

A Talk by Nina Boyarchenko



Abstract
(joint with Andreas Fuster and David O. Lucca)
Spreads of agency mortgage-backed securities (MBS) vary significantly in the cross section and over time, but the sources of this variation are not well understood. We document that, in the cross section, MBS spreads adjusted for the prepayment option show a pronounced smile with respect to the MBS coupon. We propose prepayment model risk as a candidate driver of MBS spreads and present a new pricing model that uses “stripped” MBS prices to identify the contribution of this risk to option-adjusted spreads. With this pricing model, we find that prepayment model risk explains the smile, while the variation in the time series is mostly accounted for by a non-prepayment-risk component, which is related to credit risk in fixed- income markets and MBS supply. Finally, we study the MBS market response to the Fed’s large-scale asset purchases and show that the model is consistent with spread movements following the initial announcement and, in particular, the fanning out of option-adjusted spreads across different coupons.


Biography
Nina Boyarchenko joined the Federal Reserve Bank of New York in 2011 as an Economist in the Capital Markets Function. Her research interests are in Macro Asset Pricing and Financial Economics. She holds a joint PhD in Finance and Economics from the University of Chicago, Booth School of Business and Department of Economics, as well as a B.S. in Applied Mathematics from University of Texas at Austin.

About the Series
The IAQF's Thalesians Seminar Series is a joint effort on the part of the IAQF (www.iaqf.org) and the Thalesians (www.thalesians.com). The goal of the series is to provide a forum for the exchange of new ideas and results related to the field of quantitative finance. This goal is accomplished by hosting seminars where leading practitioners and academics present new work, and following the seminars with a reception to facilitate further interaction and discussion. Click here for information on the IAQF/Thalesian Seminar Series.

Registration Fees:
IAQF Members: Complimentary by registering through this site
Thalesian Members: $25.00 by registering through this link
Non-Members: $25.00 by registering through this site
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