MSCI Agency Fixed Rate Base Prepayment Model
Sep 18, 2018
Two types of prepayment risk challenge the MBS investor: contraction and extension. Contraction risk arises as prepayment increases, and extension risk occurs when prepayment decreases. Contraction risk had been the dominating concern as the global fixed income market experienced a secular rally for 35 years. Now, as mortgages rates are rising, extension is now on the investor’s radar, and this requires a solid understanding of base prepayment speeds. We present a detailed decomposition of base prepayment speed and specifications of our new MSCI agency fixed rate base prepayment model.
- Yihai Yu, Executive Director, MSCI Research