RT Journal Article
SR Electronic
T1 A Non-Parametric Prepayment Model and Valuation of Mortgage-Backed Securities
JF The Journal of Fixed Income
FD Institutional Investor Journals
SP 50
OP 67
DO 10.3905/jfi.2000.319237
VO 10
IS 1
A1 Narasimhan Jegadeesh
A1 Xiongwei Ju
YR 2000
UL https://pm-research.com/content/10/1/50.abstract
AB 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.