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The Journal of Fixed Income

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Primary Article

Constant-Duration Mortgage Index

Lev Dynkin, Jay Hyman, Vadim Konstantinovsky and Ravi K Mattu
The Journal of Fixed Income Summer 2000, 10 (1) 79-96; DOI: https://doi.org/10.3905/jfi.2000.319239
Lev Dynkin
Managing director at Lehman Brothers in New York.
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Jay Hyman
Senior vice president at Lehman Brothers in Tel Aviv, Israel.
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Vadim Konstantinovsky
A vice president at Lehman Brothers in New York.
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Ravi K Mattu
A managing director at Lehman Brothers in New York.
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Abstract

The authors introduce an MBS index dynamically rebalanced to a desired duration target. It can serve as a performance benchmark for MBS portfolios that are delta-hedged against fixed liabilities or duration targets. It can also be used to compare returns on mortgages to returns on Treasuries with the same duration. Performance results show that the return advantage in a stable yield environment more than compensates for the adverse effect of negative convexity in trending and volatile periods. Historical simulation over 1994-1998 shows that the dynamic MBS strategy targeting the duration of the Lehman Brothers Treasury Index retains most of the mortgage-backed securities' return advantage, with a tracking error comparable to the historical volatility of excess return for other spread products.

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The Journal of Fixed Income
Vol. 10, Issue 1
Summer 2000
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Constant-Duration Mortgage Index
Lev Dynkin, Jay Hyman, Vadim Konstantinovsky, Ravi K Mattu
The Journal of Fixed Income Jun 2000, 10 (1) 79-96; DOI: 10.3905/jfi.2000.319239

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Constant-Duration Mortgage Index
Lev Dynkin, Jay Hyman, Vadim Konstantinovsky, Ravi K Mattu
The Journal of Fixed Income Jun 2000, 10 (1) 79-96; DOI: 10.3905/jfi.2000.319239
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