%0 Journal Article %A Lev Dynkin %A Vadim Konstantinovsky %A Bruce D Phelps %T Tradable Proxy Portfolios for an MBS Index %D 2001 %R 10.3905/jfi.2001.319307 %J The Journal of Fixed Income %P 70-87 %V 11 %N 3 %X To some investors, the mortgage-backed securities market may seem intimidating. The authors show how investors with limited MBS experience can construct two proxy portfolios of liquid MBS securities that replicate the mortgage portion of the Lehman Brothers Global Aggregate Index. The first replication strategy holds only TBA contracts in the proxy portfolio. From January 1994 through May 2001 this TBA-only strategy exhibited a realized tracking error of 21 basis points per year. Better tracking is achieved by a second strategy, which buys large pools of current mortgage production and allows them to season over time. As the number of holdings in this large pool-only proxy rises, and the portfolio seasons, tracking error steadily declines to 5 basis points per year over the last two years. A variant that restricts the number of holdings to 12 produces a realized tracking error of 15 basis points per year. The chief merit of both strategies is an easy and effective replication of the MBS index without pool-level knowledge of the mortgage market. %U https://jfi.pm-research.com/content/iijfixinc/11/3/70.full.pdf