We assess nonparametric kernel density regression as a technique for estimating mortgage loan prepayments - one of the key components in pricing highly volatile mortgage-backed securities and their derivatives. The highly non-linear and so-called quot;irrationalquot; behavior of the prepayment...

We assess nonparametric kernel density regression as a technique for estimating mortgage loan prepayments - one of the key components in pricing highly volatile mortgage-backed securities and their derivatives. The highly non-linear and so-called quot;irrationalquot; behavior of the prepayment...

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...