Volatility, Mortgage Default, and CMBS Subordination
نویسندگان
چکیده
This paper calculates loan-by-loan estimates of commercial real estate implied volatility using all commercial mortgages in 206 public CMBS deals from 1996 through 2005 — a total of over 14,000 loans. The implied volatilities average about 20–24% per annum, with some differences across property types. Using these implied volatilities, we compute the distribution of default rates for representative CMBS pools under realistic assumptions, and find that the subordination levels for recent vintages of CMBS imply a high likelihood of default for what are supposed to be investment-grade tranches. ∗Please address correspondence to (Downing): Barclays Global Investors, 45 Fremont St., San Francisco, CA 94105. Phone: (415) 817-6108. Fax: 415-618-5666. E-mail: [email protected]. (Stanton): Haas School of Business, University of California at Berkeley, Berkeley, CA 94720. Phone: (510) 642-7382. E-Mail: [email protected]. (Wallace): Haas School of Business, University of California at Berkeley, Berkeley, CA 94720. Phone: (510) 642-4732. Fax: (510) 643-7357. E-Mail: [email protected]
منابع مشابه
Commercial Mortgage Workout Strategy and Conditional Default Probability: Evidence from Special Serviced CMBS Loans
This study recognizes that commercial mortgage default is not a one-step process and examines a previously unexplored aspect in the whole default process, that is the stage between the initial delinquency and default. We distinguish the servicers' behavior from the borrowers' behavior. A multinomial logit model is applied to analyze the servicers' choice of workout options and a proportional ha...
متن کاملWhat is Subordination About? Credit Risk and Subordination Levels in Commercial Mortgage-backed Securities (CMBS)
Subordination is designed to provide credit risk protection for senior CMBS tranches by allocating the initial credit losses to the more junior tranches. Subordination level should in theory reflect the underlying credit risk of the CMBS pool. In this paper, we test the hypothesis that subordination is purely about credit risk as intended. We find a very weak relation between subordination leve...
متن کاملDiscussant remarks on Andrew Felton and Joseph B Nichols' paper "Commercial real estate loan performance at failed US banks"
This is a very nice paper, well motivated and based on a unique dataset. Using loan-level data from community banks entering Federal Deposit Insurance Corporation (FDIC) receivership, the paper estimates the probability of default (PD) and loss-given default (LGD) of two distinct types of commercial real estate (CRE) loans. The authors also compare commercial real estate loans in community bank...
متن کاملCommercial Mortgage Backed Securities (CMBS) and Market Efficiency with respect to Costly Information
Commercial mortgage backed securities (CMBS) are complex asset backed securities trading in markets that do not currently use derivatives pricing technology. This lack of usage is due to the complexity of the modeling exercise, and only the recent and costly availability of historical data. As such, CMBS markets provide a natural environment for the testing of market efficiency with respect to ...
متن کامل