TY - JOUR T1 - The Determinants of Expected Returns on Mortgaged-Backed Securities JF - The Journal of Fixed Income SP - 8 LP - 18 DO - 10.3905/jfi.1999.319257 VL - 9 IS - 2 AU - David T. Brown Y1 - 1999/09/30 UR - https://pm-research.com/content/9/2/8.abstract N2 - The 1998 liquidity crisis in the bond markets resulted in wider spreads across all spread product sectors. Using weekly OAS estimates from four MBS brokers over the 1993-1997 time period for GNMA and FNMA collateral, this article provides evidence that the expected excess return on mortgaged-backed securities (the OAS) is highly correlated with corporate spreads over a long period of time that does not include the 1998 illiquidity crisis. In addition, the OAS increases with the option value of the prepayment call option in the underlying collateral; the OAS is positively related to the implied volatility of interest rates; and OAS is wider when the call option on the underlying collateral is at or near the money. The empirical relationship between the OAS and relative coupon supports the notion that the accuracy of the model duration of an MBS is limited by the assumption that the OAS is independent of rate changes. ER -