Modelling the instability of mortgage-backed prepayments
AbstractPrepayment plays a critical role in the performance of mortgage-backed securities. For this reason, market participants have devoted substantial resources to developing formal mathematical models of mortgage prepayment. Despite their considerable efforts, however, the forecasting effectiveness of these propriety models has been unreliable. This paper investigates the structure of the prepayment function. We demonstrate that the prepayment function is nonlinear and heteroskedastic. In particular, we find that prepayments are increasingly more volatile at higher interest rate spreads. Our analysis suggests that these unusual properties of pool prepayments are inherently caused by statistical aggregation.
Download InfoIf 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.
Bibliographic InfoPaper provided by Federal Reserve Bank of New York in its series Research Paper with number 9804.
Date of creation: 1998
Date of revision:
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral 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: (Amy Farber).
If references are entirely missing, you can add them using this form.