Estimating Default Probabilities Implicit in Commercial Mortgage Backed Securities (CMBS) |
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| Authors: | James B Kau Donald C Keenan Yildiray Yildirim |
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| Institution: | (1) Department of Insurance, Legal Studies and Real Estate, University of Georgia, Athens, GA 30602, USA;(2) Department of Economics, University of Georgia, Athens, GA 30602, USA;(3) Whitman School of Management, Syracuse University, Syracuse, NY 13244, USA |
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| Abstract: | This paper uses a structural credit risk model, providing an analytical formula to estimate default probabilities implicit
in commercial mortgage backed security prices. Empirical studies of CMBS default have focused on the probability of default
depending on loan characteristics at the origination and market indices. Recent studies show that unobservable current loan-to-value
(LTV) ratio is a key state variable driving default. We update this variable using Real Estate Investment Trust (REIT) property-type
indices over time. Later, we employ first passage time approach to study CMBS default using implied LTV.
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| Keywords: | CMBS Default Structural model |
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