In this release of SPV we complete the final step towards an upgrade of the DMBS model. This means that the model formerly referred to as the M1 model now formally is called the DMBS model. The original DMBS model will henceforth be referred to as the M4 model and we will continue reestimating this model in the future.
The normal shift in the estimation window to the latest five years of data introduces a significant improvement in the fit of the larger loan groups.
For the theme of this release we have been experimenting with a method to include burnout in the model without introducing a path dependency in the pricing algorithm, which increases the calculation time. We assume that in each loan group there is a fraction of idle borrowers, prepaying slowly. As the active borrowers of the loan group prepay, the idle group increases in relative size, causing us to observe burnout. We find that the method is capable of generating burnout at the same level as standard models and we discuss benefits and caveats in this modelling approach.