Limits of Arbitrage: Theory and Evidence From the Mortgage-Backed Securities Market

Topics:
Insurance,
Investment and Capital Markets
Tags:
Arbitrage,
Financial Services,
Mortgage-backed Security,
Northwestern University,
Theory
Source:
Northwestern University

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Overview: "Limits of Arbitrage" theories require that the marginal investor in a particular asset market be a specialized arbitrageur. The paper examines the mortgage-backed securities market in this light, as casual empiricism suggests that investors in the MBS market do seem to be very specialized. It shows that risks that seem relatively minor for aggregate wealth are priced in the MBS market. A simple pricing kernel based on the aggregate value of MBS securities prices risk in the MBS market. The evidence suggests that limits of arbitrage theories can help explain the behavior of spreads in this market.

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Format: PDF | Size: 469KB | Date: Jan 2004 | Pages: 33

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