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Prepayment Risk

Thread starter #1
Hi David,

I am studying prepayment risk on housing loan with focus on impact on liquidity gaps of a bank. I wish to apply behavioral analysis of
1. when prepayment would happen (eg. 20% in year 5, 30% in year 10 and 50% in year 15) for a fixed tenor year loan (say 30 years) and
2. how much loans get prepaid (e.g. 4% of 30 year loan portolio)
3. why prepayment happened (due to interest rate change by this bank or due to other reasons).

Can you explain me how to measure point number 3?
 

David Harper CFA FRM

David Harper CFA FRM
Staff member
Subscriber
#2
Hi @arpitpmehta please see (eg)
For good discussion I recommend
 
Last edited:
Thread starter #3
Hi David,

Though your posts above helps in understanding MBS, I wish to quantify very basic aspects: -

I wish to measure how drop in loan interest rates leads to prepayment. I will ultimately use this as behavioral analysis for determining prepayment percentage and tenor and use it for ALM purpose for strucural liquidity gap analysis.

Please help in how to quantify the same.
 

bpdulog

Active Member
#5
Hi David,

I am studying prepayment risk on housing loan with focus on impact on liquidity gaps of a bank. I wish to apply behavioral analysis of
1. when prepayment would happen (eg. 20% in year 5, 30% in year 10 and 50% in year 15) for a fixed tenor year loan (say 30 years) and
2. how much loans get prepaid (e.g. 4% of 30 year loan portolio)
3. why prepayment happened (due to interest rate change by this bank or due to other reasons).

Can you explain me how to measure point number 3?
Your point 3 is very difficult to quantify, because it is very idiosyncratic. The prepayment can either be due to market factors like interest rates or life events such as job relocation, I am not even sure if banks record this kind of data.
 
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