Abstract: Transactions Costs and Hedging Strategies in Secondary Mortgage Markets

Extract

During periods of increased rates of inflation and the concomitant increase in the level of interest rates, the secondary mortgage market has exhibited a recurring pattern of illiquidity as funds are bid away from the institutions participating in the residential mortgage market. Much of the existing literature and policy addressed to this topic is developed within the framework of the financial disintermediation and credit rationing paradigm. This paper presents an alternative explanation based on the theory of transaction costs and pricing in thin markets.