Abstract
In this paper BG Banks Danish MBB Prepayment modeling approach are being specified, estimated and validated.Prepayment modeling is not an exact science, like all model building it is a question of selection the most important factors that describe the evolution in the dependent variable - in this case the re-payment.When specifying our model, we decided to focus on the most important variables and the mechanism that underlies the prepayment behaviour - given our hypothesis. We defined this mathematically and estimated the unknown parameter vector - with the goal - of obtaining intuitive parameter values that supported our initial hypothesis regarding the nature of prepayment behaviour. In the paper it is shown that - as a general rule - our hypothesis about prepayment behaviour was supported. Furthermore, we obtained a degree-of-explanation equal to 79 for the estimation period 1995-2000.All in all we are very pleased with the obtained results. First of all they are intuive and secondly, the model gives a (very) satisfactory description of the actual historical re-payment pattern.
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