Advanced Search
MyIDEAS: Login to save this article or follow this journal

Complete Prepayment Models for Mortgage-Backed Securities

Contents:

Author Info

  • Pan Kang

    (HERMES Lab for Financial Modeling and Simulation, Decision Sciences Department, The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

  • Stavros A. Zenios

    (HERMES Lab for Financial Modeling and Simulation, Decision Sciences Department, The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

Abstract

The estimation of prepayment rates for pools of mortgages is a critical component in determining the value of mortgage-backed securities---MBS for short---and derivative products. This paper discusses the development of prepayment models for pools of fixed-rate mortgages. The models are complete: calibrated functional forms are given for all of the factors that determine prepayment rates. Hence, the models can be used as benchmarks against the simple models of the Public Securities Association, the Federal Housing Administration experience, or the variety of projected prepayment rates generated by proprietary industry models. The key factors that determine prepayment rates are: (1) refinancing incentive, (2) seasonal variations, (3) seasoning of the mortgage pool, and (4) burnout effect. Each factor is modeled separately and is calibrated using historical data. A multiplicative relationship determines the prepayment rate of the mortgage pool. A novel feature of our model is the use of basis functions that capture the complex interactions between the control variables, i.e., interest rate differentials and time, and the response parameter, i.e., prepayment rates.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://dx.doi.org/10.1287/mnsc.38.11.1665
Download Restriction: no

Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 38 (1992)
Issue (Month): 11 (November)
Pages: 1665-1685

as in new window
Handle: RePEc:inm:ormnsc:v:38:y:1992:i:11:p:1665-1685

Contact details of provider:
Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA
Phone: +1-443-757-3500
Fax: 443-757-3515
Email:
Web page: http://www.informs.org/
More information through EDIRC

Related research

Keywords: mortgage-securities; prepayments; regression analysis; security pricing;

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. L. Smith & Baiqiang Jin, 2007. "Modeling exposure to losses on automobile leases," Review of Quantitative Finance and Accounting, Springer, vol. 29(3), pages 241-266, October.
  2. Erwin Charlier & Arjan van Bussel, 2003. "Prepayment Behavior of Dutch Mortgagors: An Empirical Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 31(2), pages 165-204, 06.
  3. Merino Maestre, María & Pérez Sainz de Rozas, Gloria & Escudero Bueno, Laureano F. & Garín Martín, María Araceli, 2005. "A two-stage stochastic integer programming approach," BILTOKI 2005-01, Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística).
  4. Michael LaCour-Little & Gregory H. Chun, 1999. "Third Party Originators and Mortgage Prepayment Risk: An Agency Problem?," Journal of Real Estate Research, American Real Estate Society, vol. 17(1), pages 55-70.
  5. Golub, Bennett & Holmer, Martin & McKendall, Raymond & Pohlman, Lawrence & Zenios, Stavros A., 1995. "A stochastic programming model for money management," European Journal of Operational Research, Elsevier, vol. 85(2), pages 282-296, September.
  6. Zenios, Stavros A. & Holmer, Martin R. & McKendall, Raymond & Vassiadou-Zeniou, Christiana, 1998. "Dynamic models for fixed-income portfolio management under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 22(10), pages 1517-1541, August.
  7. Consiglio, Andrea & Zenios, Stavros A., 1997. "A model for designing callable bonds and its solution using tabu search," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1445-1470, June.
  8. S. Nielsen, Soren & Poulsen, Rolf, 2004. "A two-factor, stochastic programming model of Danish mortgage-backed securities," Journal of Economic Dynamics and Control, Elsevier, vol. 28(7), pages 1267-1289, April.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:38:y:1992:i:11:p:1665-1685. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.