As was the case in the previous release of SPV, the subject of the theme of this release is prepayments originating from borrowers switching from fixed rate loans to adjustable rate loans, referred to as Fixed-to-Float prepayments. Continuing the data analysis of the previous release we make a preliminary extension to the current prepayment model in order to incorporate Fixed-to-Float prepayment. The proposed extension to the prepayment model uses information on the slope of the yield curve to forecast Fixed-to-Float prepayment.
The resulting prepayment model gives us a clear indication on how Fixed-to-Float prepayment can be incorporated in the existing model. However, further investigations are needed before the model can be included among the standard SPV models.
An overview of previous SPV themes can be found
here.