NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Brett Dunn

UCLA
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Los Angeles, CA 90095

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NBER Working Papers and Publications

March 2016Macroeconomic-Driven Prepayment Risk and the Valuation of Mortgage-Backed Securities
with Mikhail Chernov, Francis A. Longstaff: w22096
We introduce a reduced-form modeling framework for mortgage-backed securities in which we solve for the implied prepayment function from the cross section of market prices. From the implied prepayment function, we find that prepayment rates are driven not only by interest rates, but also by two macroeconomic factors: turnover and rate response. Intuitively, turnover represents prepayments for exogenous reasons like employment-related moves, household income shocks, and foreclosures, while rate response reflects frictions faced by borrowers in refinancing into a lower rate. We find that the empirical turnover and rate response measures are both significantly related to macroeconomic measures, suggesting that these factors represent a source of systematic risk. Consistent with this, we find ...
 
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