In the 3rd Quarter 2003 release of SPV the four standard models have been reestimated.
Additionally two other subjects are treated:
- A future version of the DMBS model is introduced.
- We commemorate the current version of the DMBS model by comparing the reestimated model to the first DMBS model estimated 3 years ago in the 3rd Quarter 2000 release of SPV.
1.
In many of the prior release of SPV we have been dealing with extension of the current prepayment and valuation framework. In this release the major improvements are synthesized into a future version of the DMBS model. The main changes include:
- The delivery option is now modelled in a smooth fashion, generating far more stable option adjusted sensitivities.
- We depart from the bootstrapped swap curve provided by Reuters and estimate our own swap curve using nonparametric techniques.
- The valuation method has changed from a binomial implementation to a finite difference approach where a CIR process is used instead of the current BDT model.
- The valuation method has been expanded to allow for modelling of state dependent burnout, greatly improving on the performance of the models.
- Inclusion of data on preliminary redemptions to form expectations of prepayments at the next unpublished term date.
2.
For the DMBS model of 3rd Quarter 2000 we examine the fit of the model to the prepayment observations for the last 5 years, the estimation window of the current DMBS model. This enables us to evaluate the out of sample performance of the 3 year old model. As is evident, the prepayment environment in the Danish market has evolved rapidly in the last years, which is also reflected in the estimated parameters three years ago; in general we find that the old version of the DMBS model to a greater extent than the current model under estimates prepayment, emphasizing the need for a continuous update of the prepayment model.