7
$\begingroup$

I have some trouble in choosing the right method/model for the valuation a prepayment option on a loan (in General). So far I had some ideas about valuatiing it via a simple PV-method but there should be better ways. According to my Research theory about ABS/MBS, in particular calculating the Option Adjusted Spread of the security, provides me the answer to my solution, as far as I understood. I read something about binomial trees or monte-carlo as a method of valuation? Is there any literature you could recommend regarding this topic?

Thanks,

Konstantin

Improve this question
$\endgroup$

3 Answers 3

Reset to default
2
$\begingroup$

I've been analysing the same problem and i think that the way to go it's calibrating an interest rate model. Think of it as an option on a bond, there is plenty of literature about that.

Also you can look at Quantlib implementation of callable bonds to get an idea of how can it be implemented.

Improve this answer
$\endgroup$
1
$\begingroup$

BlackRock has the best commercially available prepayment model and Yield Book is basically the industry standard for trading and is decent.

Improve this answer
$\endgroup$
0
$\begingroup$

prepayment model could be very complicated as there are so many variables could affect the prepayment rates, such as demographic, seasonality, location etc. My experience on this was I knew many companies just directly use some prepayment data from SIFMA instead of building their own model. Typical text bool models are CPR, PSA, SMM. Nowdays, machine learning should be a good tool for modeling prepayment rate

Improve this answer
$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge that you have read and understand our privacy policy and code of conduct.

Not the answer you're looking for? Browse other questions tagged or ask your own question.