I've been trying to wrap my head around prepayment risk for auto ABS, which is much less interest-rate driven than prepayment of MBS (or at least let's assume that for now, since I want to understand the nature of prepayment risk in general, and not only when prepayment is mainly driven by interest rates).The following is my understanding of the matter. I'm looking for confirmations, corrections, and things I've overlooked, any comments are appreciated!Prepayment is bad for the holder of a security if his alternative use of funds is less profitable. The natural comparison whether to determine "less profitable" is a bond of the same asset type with similar weighted average life and risk, since that is the natural reinvestment of the funds. This comparison is implicit in the nominal price of the bond when it is prepaid: for a discount bond reinvestment rate is preferred (intuitively, much of the return comes from principal), whereas for a premium bond reinvesting makes the investor worse off (he foregoes the high coupon payments).So prepayment risk refers to the possibility that a bond will be prepaid at a future point in time when it is a premium bond. I would use three variables to quantify this risk. First, the higher the nominal price of a bond, the higher is the general likelihood that it will be a premium bond in the future. Second, the position in the business cycle tells me if interest rates will go up or down (auto ABS do not live longer than one business cycle). Interest rate futures prices or some interest rate lags may be most informative about that. Finally, the WAL of a bond tells me how much time there is for prepayment risk to materialize.This quantification measures the susceptibility of a tranche to prepayment risk. The other component is how much uncertainty there is about prepayments in the pool in question. This can be measured by pool characteristics (such as age, WAC, new/used ratio), as well as the macroeconomic outlook.