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Burnout from pools to loans: Modeling refinancing prepayments as a self-selection process


  • Gan, Jumwu


In 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.

Suggested Citation

  • Gan, Jumwu, 2009. "Burnout from pools to loans: Modeling refinancing prepayments as a self-selection process," MPRA Paper 15596, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:15596

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    References listed on IDEAS

    1. Hall, Arden, 2000. "Controlling for Burnout in Estimating Mortgage Prepayment Models," Journal of Housing Economics, Elsevier, vol. 9(4), pages 215-232, December.
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    1. repec:wsi:ijtafx:v:20:y:2017:i:08:n:s0219024917500509 is not listed on IDEAS

    More about this item


    Mortgage; Prepayment; refinance; burnout; MBS; duration; convexity;

    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

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