SPV April 2011 - Estimating Fixed-to-Float Prepayment

In the theme of this release we try to estimate a prepayment model, which has been extended to model Fixed-to-Float prepayments. We investigate two explaining variables; the slope of the yield curve and the difference between the coupon rate and a short interest rate. We introduce a threshold level to the new variables to get more control over where and when we want the model to exhibit Fixed-to-Float prepayment. The estimation sample consisting of the last 9 years of prepayment observations do unfortunately not hold enough information to distinguish Fixed-to-Float prepayment from traditional prepayments. This is mainly due to a very high correlation between the new variables and the NPVGain variable in the estimation sample. We do still believe the model is a good explanation of the prepayment behavior of the borrowers, but we are unable to estimate usable parameter values from the prepayment history.