A comparative analysis of empirical mortgage prepayment models: The GNMA experience.
Item
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Title
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A comparative analysis of empirical mortgage prepayment models: The GNMA experience.
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Identifier
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AAI9108143
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identifier
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9108143
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Creator
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Lucy, Robert P.
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Contributor
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Adviser: Ronald W. Anderson
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Date
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1990
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Language
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English
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Publisher
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City University of New York.
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Subject
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Economics, Finance
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Abstract
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Most mortgage debt carries with it the right of the mortgagor to pay off the loan in whole or in part prior to maturity, sometimes without penalty. It is this prepayment option of the mortgagor that makes the valuation of mortgages and mortgage-backed securities so difficult since rational pricing must explicitly account for any expected prepayment behavior. This thesis has as its main objective the estimation, interpretation, and comparison of prepayment probabilities from two distinct types of empirical models, the proportional hazard model and the aggregate logit model. Both address the following specific question: what is the conditional probability of a mortgagor prepaying his mortgage given the current set of exogenous factors that are thought to influence such behavior? The models are estimated using monthly observations of outstanding principal on GNMA pools. The proportional hazard model is found to fit the GNMA prepayment data quite poorly whereas the aggregate logit model is found to provide a more than adequate fit. The estimated aggregate logit models predict that the probability of prepayment is directly related to the financial incentive to refinance a mortgage by either of two measures although the responsiveness to either measure is not constant over time. In addition, prepayments are shown to react in a nonsymmetrical way to changes in the market interest rate above and below the contracted rate, they exhibit a non-monotonic pure-aging effect, there appears to be seasonality in prepayments, and prepayments seem to be counter-cyclical. In addition, prepayments are estimated to increase in a volatile interest rate environment. This last result is contrary to the predictions of standard option pricing theory.
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Type
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dissertation
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Source
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PQT Legacy CUNY.xlsx
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degree
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Ph.D.
