Premium
THE ESTIMATION OF MORTGAGE PREPAYMENT RATES
Author(s) -
Navratil Frank J.
Publication year - 1985
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1985.tb00392.x
Subject(s) - prepayment of loan , interest rate , fixed interest rate loan , differential (mechanical device) , economics , floating interest rate , estimation , econometrics , actuarial science , monetary economics , finance , engineering , management , aerospace engineering
This paper uses a model in which prepayment rates on large pools of mortgages are a function of the differential between the prevailing market rate for mortgages and the contract rate at which the mortgages were originally issued. The empirical part of the paper shows a significant inverse relationship between the interest‐rate differential and prepayment rates. The relationship is most elastic whenever the current market rate for mortgages is between one and three percent below the contract rate of the pool. For a given interest‐rate differential, the estimated prepayment rate generally decreases and the elasticity increases as the contract rate rises.