NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Prepayment Risk and Expected MBS Returns

Peter Diep, Andrea L. Eisfeldt, Scott Richardson

NBER Working Paper No. 22851
Issued in November 2016, Revised in March 2017
NBER Program(s):AP, CF, EFG

We present a simple, linear asset pricing model of the cross section of Mortgage-Backed Security (MBS) returns in which 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 are monotonic in securities' coupons relative to the par coupon, as predicted by the model. 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.

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

Access to NBER Papers

You are eligible for a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.

E-mail:

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w22851

Users who downloaded this paper also downloaded* these:
Linnainmaa and Roberts w22894 The History of the Cross Section of Stock Returns
Levine, Ooi, and Richardson w22793 Commodities for the Long Run
Neuhierl and Weber w22831 Monetary Policy and the Stock Market: Time-Series Evidence
Stiglitz w22837 The Theory of Credit and Macro-economic Stability
Bekaert, Engstrom, and Ermolov w22839 Macro Risks and the Term Structure of Interest Rates
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us