The impact of large-scale mortgage backed security purchases

A Work Project, presented as part of the requirements for the Award of a Masters Degree in Finance from the NOVA – School of Business and Economics

I analyze the impact that large-scale Mortgage Backed Securities (MBS) purchases carried by the Federal Reserve in response to the financial crisis had in the economy and find that they were able to enhance confidence in financial markets and influence MBS pricing. Default probabilities of financial companies fell 33 basis points, which can be explained by the lower quantity of MBS in their balance sheets and the increased value of the MBS remaining in their asset side. The default risk premium of MBS decreased 66 basis points, which represents 22% of the reduction in MBS yields in the period analyzed.