Burnout from pools to loans: Modeling refinancing prepayments as a self-selection process
AbstractIn this paper we present compelling evidence from a detailed analysis of historical prepayment data to demonstrate that a mortgage cohort remembers the level of the previous mortgage rate troughs experienced by the cohort. This is a general property, observed ubiquitously, that inescapably leads to refinancing models with a continuous distribution of refinancing incentive thresholds (elbows). We present such a new refinancing model, derived from the first principle, based on a single assumption that each loan has an incentive threshold above which its borrower will refinance. In this model, the refinancing prepayment of a cohort is a dynamic self-selection process that evolves by itself according to the encountered mortgage rate environment with the cohort concurrently acquiring its memory along the way.
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 University Library of Munich, Germany in its series MPRA Paper with number 15596.
Date of creation: 31 May 2009
Date of revision:
Mortgage; Prepayment; refinance; burnout; MBS; duration; convexity;
Find related papers by JEL classification:
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- G19 - Financial Economics - - General Financial Markets - - - Other
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hall, Arden, 2000. "Controlling for Burnout in Estimating Mortgage Prepayment Models," Journal of Housing Economics, Elsevier, vol. 9(4), pages 215-232, December.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.