MBS Dollar Rolls: Delivery Optionality, Volatility, and OAS

Summary

The document explains dollar rolls from the perspective of the buyer, who purchases TBA mortgage-backed securities for a nearer month and sells them for a later month. Because delivery follows SIFMA guidelines and allows variation in pool characteristics that affect prepayments, the buyer is effectively short a delivery option. Greater interest-rate volatility can increase the value of that option by increasing the chance of receiving pools with more negative convexity. This makes the roll less attractive to the buyer and raises the seller’s financing benefit or lowers the implied financing rate.

It also describes a feedback between dollar-roll financing and TBA option-adjusted spreads. A more valuable roll improves carry and can make TBAs richer, reflected in a lower OAS; a rich TBA can also attract more short positions, increasing roll demand and lowering financing costs. The relationship is described as interconnected, with no single causal direction established. The discussion is conceptual and offers no quantitative model, market data, or guidance for isolating roll value from pool-specific effects.

Key ideas

• A buyer of a TBA dollar roll is exposed to delivery optionality over the pools received.
• Higher interest-rate volatility can increase the value of that delivery option and make the roll less attractive to the buyer.
• Dollar-roll financing and TBA OAS can influence each other through carry and short-position demand.
• The described relationship is two-way, so the document does not establish a single causal driver.

Tags

# MBS Dollar roll mechanics


# MBS Dollar roll mechanics












Had a few questions on MBS Dollar rolls:

- How are dollar rolls affected by Interest rate Volatility?

- Does the OAS of underlying pools matter to dollar rolls, and if so, how do they affect it?

- Does the dollar roll itself potentially impart value to underlying pools? Why does that happen?

Thank You

## Answer by Sharad (score 3, accepted)

https://quant.stackexchange.com/a/71055

- It is useful to think from the perspective of the institution who is buying the roll (i.e., purchasing TBAs in the front month and selling in the back month). They are short a delivery option: the pools they receive are governed by SIFMA guidelines that impose virtually no restrictions on many of the collateral characteristics that drive prepayment rates on mortgage pools. Interest rate volatility increases the value of this option (i.e., makes it more likely that the buyer of the roll will be delivered a more negatively convex position) and consequently makes the roll less attractive (increases financing costs for the seller of the roll).

- TBA OASs and dollars rolls are tightly interrelated, although figuring out which drives which is often a chicken-and-egg problem. For example: the higher the value of the dollar roll/the lower the financing rate, the richer the TBA gets (lower OAS) because of the more attractive carry. Conversely, a rich TBA (low OAS) invites a greater short base which in turns leads to higher demand for the roll (lower financing costs).

- Effectively addressed in (2).

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.