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The composition of CMBS risk

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  • Christopoulos, Andreas D.

Abstract

This paper identifies the put-option, liquidity availability proportion, and shadow liquidity risk premia embedded within commercial mortgage backed securities (CMBS) using reduced form and structural generalization models. These risk values are then interpreted as trading signals which are tested with automated trading strategies that buy undervalued and sell overvalued CMBS from November 2007 through June 2015. All three signals generate substantial positive trading profits in testing for the reduced form model but not for the structural generalization. The risk signals constructed independently of market pricing provide more profitable automated trading insights than those constructed from interactions between modeled risk measures and market spreads. In my tests of the information content of the risk signals with respect to future macroeconomic indicators, I find statistically significant evidence in keeping with recent studies. While I cannot reject CMBS efficiency, this paper’s disclosure of new risk measures, the profitability of automated strategies based on those risk measures, and the statistical significance of their forward guidance capabilities, together contributes to our understanding of CMBS risk and the credit spread puzzle debate.

Suggested Citation

  • Christopoulos, Andreas D., 2017. "The composition of CMBS risk," Journal of Banking & Finance, Elsevier, vol. 76(C), pages 215-239.
    • Handle: RePEc:eee:jbfina:v:76:y:2017:i:c:p:215-239
    DOI: 10.1016/j.jbankfin.2016.12.005
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    Cited by:

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    2. Matteo Salto & Stefano Zedda & Stefan Zeugner, 2020. "Using Supra-Covered Bonds to Enhance Liquidity in the Euro Area: Assessment of Advantages for the Banking Sector," JRFM, MDPI, vol. 13(12), pages 1-10, November.

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    More about this item

    Keywords

    CMBS; Credit risk; Credit spread puzzle; Financial crisis; Liquidity premia; Market efficiency; Put-option;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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