FRB Should buy ABX and CMBX, rather than ABS cash bonds.
Question: There are one asset with Very Huge market value, difficult to price and very low liquidity, and its future is traded with low liquidity. One day, the future was priced 10% below its cash asset. How will the price, future and cash asset, change?
1) Banks which have the asset was forced to write down their asset. Due to the size of write down, some banks may be forced to sell cash asset
2) The implied price shows that the price of the asset will go down, so he price of cash asset begins to decline, slowly and smoothly because of low liquidity
3) Banks which want to hedge the position sell futures, so future price decline
4) Go back to 1) until all banks and investors finishes to sell or hedge
5) Future price is gettting stabilized. The cash asset price decline, slowly and smoothly down to future price.
I think the cash asset will converge to future price. This means residential real estate will fall down to the level which is priced in ABX.