PRICING EFFECTS IN FANNIE-MAE AGENCY BONDS

As a government-sponsored enterprise, Fannie Mae enjoys certain advant ages over other firms. The extent of these advantages, while widely di scussed, have not yet been fully quantified. This paper empirically ex amines the returns to Fannie Mae general obligation bonds under the as sumptions of the Arbitrage Pricing Theory. The model provides an expli cit method for estimating the risk premium on Fannie Mae bonds. The re sults indicate that liquidity and tax effects are important in explain ing the returns to Fannie Mae bonds. The results also indicate that th e market does not incorporate changes in the riskiness of the mortgage market into the returns on Fannie Mae bonds. The results provide supp ort for the contention that Fannie Mae, as a government sponsored ente rprise, enjoys a significant advantage over other firms in the capital market.