Structural Models:
Treats prepayment as a (American) call option of the mortgage. Tries to solve for the optimal exercise strategy. Focuses on why loans terminate. Needs full information set for calibration (i.e., not just market prices). Computationally too expensive to be practical. Some primitive Structural Models do not allow for mortgages to exceed par.
Example: Dunn and McConnell (1981)
Reduced-Form Models:
Focuses on how (or, when) loans terminate. Needs only partial information set for calibration. Poor out-of-sample performance. Often are hazard models.
Example: Schwartz and Torous (1989)
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