Copenhagen Stock Exchange: Focus No. 36: Prepayment Behaviour In The Danish Mortgage Bond Market

For the pricing and risk management of mortgage credit bonds a transparent model for the prepayment behaviour is generally preferred, a model which exclusively builds on fundamental factors such as the level of interest rates.

In Focus no. 36 the authors Henrik Arp and Lone Villemoes, Danske Bank, assess that the focus is aimed at modelling the interest-rate driven prepayment risk when modelling the prepayment behaviour.

In the more short-term analyses, the authors estimate that it may be necessary to adjust the model's estimates for other influencing factors that are not incorporated in the model and which may vary from one payment date to another. This could for instance be the advice rendered by the individual mortgage lenders. Bearing this in mind, the model's estimates should be combined with ad-hoc analyses.

The authors expect the interest-rate driven prepayment risk to be more dominant at the forthcoming payment date. The differing compositions of borrowers will explain virtually all variations in prepayments among Danish mortgage lenders' bond series, while the advice mortgage institutions render to borrowers may slightly lift the overall volume of prepayments.

Read the entire article 'Prepayment behaviour in the Danish mortgage bond market' in Focus no. 36 by clicking here.