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Primary Article

A Non-Parametric Prepayment Model and Valuation of Mortgage-Backed Securities

Narasimhan Jegadeesh and Xiongwei Ju
The Journal of Fixed Income Summer 2000, 10 (1) 50-67; DOI: https://doi.org/10.3905/jfi.2000.319237
Narasimhan Jegadeesh
The Brandt distinguished professor of finance at the University of Illinois at Urbana-Champaign.
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Xiongwei Ju
A quantitative strategist in the division of quantitative trading at Knight Financial Products, LLC, in White Plains, New York.
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Abstract

A non-parametric technique called generalized additive model (GAM) estimation is particularly useful in high-dimension non-parametric estimations and in situations that involved mixed parametric and non-parametric specifications. The relationship between prepayment rates, and variables such as the age of the mortgage, the ratio of the mortgage coupon rate and prevailing interest rates, and expected and unexpected burnouts is highly non-linear, and it is difficult to capture these relations with parametric functions. Decomposition of pool burnouts into expected and unexpected components improves the model fit and has important pricing implications. The prepayment model estimated here fits the data significantly better than other models in use, and illustrates the factors that affect prepayments and the prices of mortgage-backed securities.

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The Journal of Fixed Income
Vol. 10, Issue 1
Summer 2000
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A Non-Parametric Prepayment Model and Valuation of Mortgage-Backed Securities
Narasimhan Jegadeesh, Xiongwei Ju
The Journal of Fixed Income Jun 2000, 10 (1) 50-67; DOI: 10.3905/jfi.2000.319237

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A Non-Parametric Prepayment Model and Valuation of Mortgage-Backed Securities
Narasimhan Jegadeesh, Xiongwei Ju
The Journal of Fixed Income Jun 2000, 10 (1) 50-67; DOI: 10.3905/jfi.2000.319237
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