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dc.contributor.authorHanson, Samuel Gregory
dc.date.accessioned2014-05-13T15:30:07Z
dc.date.issued2014-05-13
dc.identifier.citationHanson, Samuel Gregory. "Mortgage Convexity." Journal of Financial Economics (forthcoming). (Internet Appendix at http://www.people.hbs.edu/shanson/MBS_IA_20140104.pdf)en_US
dc.identifier.issn0304-405Xen_US
dc.identifier.urihttp://nrs.harvard.edu/urn-3:HUL.InstRepos:12175237
dc.description.abstractMost home mortgages in the U.S. are fixed-rate loans with an embedded prepayment option. When long-term rates decline, the effective duration of mortgage-backed securities (MBS) falls due to heightened refinancing expectations. I show that these changes in MBS duration function as large-scale shocks to the quantity of interest rate risk that must be borne by professional bond investors. I develop a simple model in which the risk tolerance of bond investors is limited in the short run, so these fluctuations in MBS duration generate significant variation in bond risk premia. Specifically, bond risk premia are high when aggregate MBS duration is high. The model offers an explanation for why long-term rates may appear to be "excessively sensitive" to movements in short rates and explains how changes in MBS duration act as a positive-feedback mechanism that amplifies interest rate volatility. I find strong support for these predictions in the time series of U.S. government bond returns.en_US
dc.language.isoen_USen_US
dc.publisherElsevieren_US
dash.licenseOAP
dc.subjectmortgagesen_US
dc.subjectinterest ratesen_US
dc.subjectvolatilityen_US
dc.titleMortgage Convexityen_US
dc.typeJournal Articleen_US
dc.description.versionAuthor's Originalen_US
dc.relation.journalJournal of Financial Economicsen_US
dash.depositing.authorHanson, Samuel Gregory
dc.date.available2014-05-13T15:30:07Z
dash.contributor.affiliatedHanson, Samuel


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