Improving Parametric Mortgage Prepayment Models with Non-Parametric Kernel Regression

30 Pages Posted: 16 May 2007

See all articles by Michael LaCour-Little

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

Braddock Financial Corporation - Tabor Center; Trailcrest Capital Advisors

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 LaCour-Little, Michael and Marschoun, Michael A. and Maxam, Clark L. 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)

Federal National Mortgage Association (Fannie Mae) ( email )

1100 15th St NW
Washington, DC 20005
United States
202-752-3318 (Phone)

California State University at Fullerton ( email )

5133 Mihaylo Hall
Fullerton, CA 92834-6848
United States
314-374-9626 (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

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