Liquidity and Value in the Deep vs. Shallow Ends of Mortgage-Backed Securities Pools
2012; RELX Group (Netherlands); Linguagem: Inglês
10.2139/ssrn.2082163
ISSN1556-5068
AutoresVladimir A. Atanasov, John J. Merrick,
Tópico(s)Stochastic processes and financial applications
ResumoUsing new TRACE data, we investigate the liquidity and pricing of agency mortgage-backed pass-through securities. We distinguish between a To-Be-Announced (TBA) forward delivery market and a specified-pool market. While institutional traders in the “deep end” of the specified-pool market have easy access to the TBA market, retail specified-pool traders in the “shallow end” have virtually no TBA trading access. We document that only large specified-pool transactions show strong integration with the TBA market. Easy TBA access for deep-end traders translates into abundant liquidity with balanced two-way trade flow and realized bid-ask spreads of less than 0.1%. In contrast, retail traders do not benefit from TBA integration and suffer a 4-to-1 sell-to-buy trade flow imbalance as well as 0.5% to 1% realized bid-ask spreads. We compare the prices of small and large-sized trades in the same security and find that shallow-end illiquidity causes 2% to 5% price discounts.
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