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The BondEdge ABS Prepayment Model
Wesley Phoa, Ph.D.
This paper describes the BondEdge dynamic prepayment model, which generates
valuations and risk measures for securities backed by:
- Fixed rate home equity loans
- Adjustable rate home equity loans
- Home equity lines of credit
- Home improvement loans
- Manufactured housing loans
Unlike static forecasts, the BondEdge model incorporates interest rate
sensitivity and thus recognizes the optionality inherent in these classes of
loans.
The paper includes an informal description of the model and the underlying
assumptions on which it is based; further mathematical details about the model;
an account of how model parameters were derived; and a description of the
empirical tests that were applied, based on actual ABS prepayment data.
There are also five appendixes, containing:
- Initial model parameter sets
- Time series tests of model fit
- Cross-sectional tests of model fit
- Rate sensitivity of collateral average life
- Static price/yield curves
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