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Commercial Mortgage‐Backed Security Pricing with Real Estate Liquidity Risk

Author

Listed:
  • Peimin Chen
  • Igor Kozhanov
  • Peng Liu
  • Chunchi Wu

Abstract

We propose a structural model with liquidity frictions at the property level for the pricing of commercial mortgages. The model shows that a moderate liquidity shock has a sizable effect on mortgage default risk. The sensitivities of default rates to volatility of property prices, cash payout and interest rates, all increase significantly as liquidity deteriorates. Empirical evidence strongly supports model predictions. The results suggest that failing to account for the effect of real estate illiquidity leads to substantial bias in estimation of default risk, the optimal subordination level and valuation of the structured products.

Suggested Citation

  • Peimin Chen & Igor Kozhanov & Peng Liu & Chunchi Wu, 2021. "Commercial Mortgage‐Backed Security Pricing with Real Estate Liquidity Risk," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(S2), pages 490-525, September.
    • Handle: RePEc:bla:reesec:v:49:y:2021:i:s2:p:490-525
    DOI: 10.1111/1540-6229.12297
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    References listed on IDEAS

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    Cited by:

    1. Congjin Zhou & Guojing Wang & Yinghui Dong & Pin Wang, 2024. "The Valuation at Origination of Mortgages with Full Prepayment and Default Risks," Methodology and Computing in Applied Probability, Springer, vol. 26(2), pages 1-26, June.

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