Mortgage Dollar Roll

Abstract

The most important financing strategy of agency MBS -- mortgage dollar roll -- is a secured lending contract with the unique feature that returned MBS collateral can differ from those received, creating adverse selection for the cash borrower. Using a proprietary dataset, we provide the first analysis of dollar roll specialness, the extent to which implied dollar roll financing rates fall below prevailing market rates. Dollar roll specialness increases in adverse selection and decreases in MBS liquidity. Specialness is also negatively related to expected MBS returns. Moreover, the Federal Reserve's MBS purchases and dollar roll sales are associated with lower specialness.