Finance and Economics Discussion Series (FEDS)

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April 2013

Economic Volatility and Financial Markets: The Case of Mortgage-Backed Securities

Gaetano Antinolfi and Celso Brunetti

Abstract:

The volatility of aggregate economic activity in the United States decreased markedly in the mid eighties. The decrease involved several components of GDP and has been linked to a more stable economic environment, identified by smaller shocks and more effective policy, and a diverse set of innovations related to inventory management as well as financial markets. We document a negative relation between the volatility of GDP and some of its components and one such financial development: the emergence of mortgage-backed securities. We also document that this relationship changed sign, from negative to positive, in the early 2000's.

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Keywords: Mortgage backed securities, volatility, great moderation

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Last Update: June 26, 2020