Download this Paper Open PDF in Browser

Improving Parametric Mortgage Prepayment Models with Non-Parametric Kernel Regression

30 Pages Posted: 16 May 2007  

Michael LaCour-Little

California State University at Fullerton; Federal National Mortgage Association (Fannie Mae)

Michael A. Marschoun

affiliation not provided to SSRN

Clark L. Maxam

Trailcrest Capital Advisors; Braddock Financial Corporation - Tabor Center

Abstract

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.

Keywords: prepayment, valuation, mortgages, non-parametric

JEL Classification: R51

Suggested Citation

LaCour-Little, Michael and Marschoun, Michael A. and Maxam, Clark L., Improving Parametric Mortgage Prepayment Models with Non-Parametric Kernel Regression. Journal of Real Estate Research, Vol. 24, No. 3, 2002. Available at SSRN: https://ssrn.com/abstract=986629

Michael LaCour-Little (Contact Author)

California State University at Fullerton ( email )

5133 Mihaylo Hall
Fullerton, CA 92834-6848
United States
657-278-4014 (Phone)
657-278-2161 (Fax)

Federal National Mortgage Association (Fannie Mae) ( email )

3900 Wisconsin Avenue, NW
Washington, DC 20016-2892
United States
202-752-3318 (Phone)

Michael A. Marschoun

affiliation not provided to SSRN ( email )

No Address Available

Clark L. Maxam

Trailcrest Capital Advisors ( email )

6781 Nautique Circle
Larkspur, CO 80118
United States

Braddock Financial Corporation - Tabor Center ( email )

1200 17th Street, Suite 880
Denver, CO 80202
United States

Paper statistics

Downloads
272
Rank
93,477
Abstract Views
1,098