An Empirical Analysis of Differential Price Movements in Gnma Pass-Through Security and Government Bond Markets
Heuson, Andrea Jane
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https://hdl.handle.net/2142/71509
Description
Title
An Empirical Analysis of Differential Price Movements in Gnma Pass-Through Security and Government Bond Markets
Author(s)
Heuson, Andrea Jane
Issue Date
1982
Department of Study
Finance
Discipline
Finance
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Business Administration, Banking
Abstract
The Government National Mortgage Association (GNMA) pass-through security is a secondary mortgage market instrument whose Federally-guaranteed cash flows mirror the payments on an underlying pool of government-insured mortgages. Previous studies have attempted to model the pricing of, or determine the appropriate ex ante yield on, the securities, but past research has failed to explain an important characteristic of GNMA pass-throughs. An examination of GNMA prices from an historical perspective indicates that the securities are influenced by factors not found in the market for government bonds with comparable terms to maturity and default risk.
This thesis develops an econometric model that explains the prices of GNMA 8% pass-throughs by concentrating on the institutional characteristics of the security, and of primary and secondary mortgage markets. The hypothesized effect of the various explanators is derived in a theoretically sound manner via a simultaneous equation system. The model is validated by testing its explanatory power and forecasting accuracy versus several sophisticated endogenous models and by its successful application to the problem of hedging GNMA cash market portfolios in the GNMA futures market under realistic simulation constraints.
The fact that primary and secondary mortgage market factors influence the price of the pass-through security in a manner that is compatible with the tenets of microeconomic theory indicates that GNMA's mortgage-backed securities program is fulfilling its legislated purpose--improving the allocational efficiency of the mortgage market. From a practical standpoint, the model's value to a discretionary hedger should be of interest to loan originators and other secondary mortgage market participants. The results of this thesis also suggest problems for future research in the areas of cash market/futures market price relationships and the simultaneous pricing efficiency of futures markets for various instruments.
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