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Improving Parametric Mortgage Prepayment Models with Non-parametric Kernel Regression

  • Michael LaCour-Little

    ()

    (Washington University in St. Louis and Wells Fargo Home Mortgage in Clayton, MO 63105)

  • Michael Marschoun

    ()

    (PMI Mortgage Insurance Co., San Francisco, CA 94111)

  • Clark L. Maxam

    ()

    (Montana State University, Bozeman, MT 59717)

Registered author(s):

    Developing a good prepayment model is a central task in the valuation of mortgages and mortgage-backed securities but conventional parametric models often have bad out-of-sample predictive ability. A likely explanation is the highly non-linear nature of the prepayment function. Non-parametric techniques are much better at detecting non-linearity and multivariate interaction. This article discusses how non-parametric kernel regression may be applied to loan level event histories to produce a better parametric model. By utilizing a parsimonious specification, a model can be produced that practitioners can use in valuation routines based on Monte Carlo interest rate simulation.

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    Article provided by American Real Estate Society in its journal Journal of Real Estate Research.

    Volume (Year): 24 (2002)
    Issue (Month): 3 ()
    Pages: 299-328

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    Handle: RePEc:jre:issued:v:24:n:3:2002:p:299-328
    Contact details of provider: Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
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    Order Information: Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
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    1. Deng, Yongheng, 1997. "Mortgage Termination: An Empirical Hazard Model with a Stochastic Term Structure," The Journal of Real Estate Finance and Economics, Springer, vol. 14(3), pages 309-31, May.
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    16. Green, Richard K. & LaCour-Little, Michael, 1999. "Some Truths about Ostriches: Who Doesn't Prepay Their Mortgages and Why They Don't," Journal of Housing Economics, Elsevier, vol. 8(3), pages 233-248, September.
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