Mean Reversions in GNMA Returns
The random-walk hypothesis is tested in the prices of mortgage-backed securities traded in the secondary market. Using the variance ratio test, the random-walk hypothesis is rejected for the daily GNMA bond return. We identify two components in the return series: a systematic component reflecting the market pricing on the expected information, and a noise term that represents the pricing on the unexpected information. After adjusting for the impact of bid-ask spread and thin trading on the price quotations, the evidence suggests that the short-horizon, weekly realized return, being dominated by the negative serial correlation of the random component, exhibits a mean-reverting process. However, it is also found that the noise term demonstrates significant positive serial correlation for holding periods of over two weeks. Thus, for longer-term returns, the realized return exhibits positive dependence. The implication is that the price of GNMA bonds did not react to unexpected information in a rational fashion in that the adjustment process is not instantaneous. Copyright American Real Estate and Urban Economics Association.
Year of publication: |
1990
|
---|---|
Authors: | Ma, Christopher K. |
Published in: |
Real Estate Economics. - American Real Estate and Urban Economics Association - AREUEA. - Vol. 18.1990, 2, p. 207-226
|
Publisher: |
American Real Estate and Urban Economics Association - AREUEA |
Saved in:
freely available
Saved in favorites
Similar items by person
-
The effect of call-option-listing announcement on shareholder wealth
Rao, Ramesh P., (1987)
-
Futures price limit moves as options
Holder, Mark E., (2002)
-
The information content of price limit moves
Belcher, Larry, (2003)
- More ...