Andrea Vedolin
Bio sketch: Andrea Vedolin joined the Department of Finance at the London School of Economics in June 2010. Andrea received her PhD in Economics from the University of Lugano. Her main research interests are at the intersection of theoretical and empirical asset pricing with a special focus on derivatives pricing.
Abstract: We study the feedback from mortgage portfolios hedging on the level and volatility of interest rates. We incorporate the supply effects resulting from hedging into an otherwise standard dynamic term structure model, and derive two sets of predictions which are strongly supported by the data: First, the duration of mortgage-backed securities (MBS) positively predicts excess bond returns, especially for longer maturities. Second, MBS convexity increases the volatility of all yields, and this effect has a hump-shaped term structure. Empirically, neither duration, nor convexity are spanned by yield factors. A calibrated version of our model replicates salient features of first and second moments of bond yields.
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