IS THE U.S. SECONDARY MORTGAGE MARKET SEGMENTED FROM OTHER FINANCIAL MARKETS?

This paper models the relationship between a variety of costs of fonds variables and three key secondary mortgage market rates in the U.S. from 1980 through 1996. The attempt is to investigate the extent to which the mortgage market is linked to other financial markets and also find out if the gyrations in mortgage rates that followed deregulation can be explained by changes in costs of fonds. The cointegration of these variables is explored within the vector autoregressive (VAR) system. The results of Johansen cointegration test indicate an existence of four cointegrating equations in the partially nonstationary system. Therefore, there are some long-run equilibrium relationships in the time series. These results have implications on the efficiency of these markets and consequently on portfolio diversification opportunities for investors.