Estimating Default Probabilities Implicit in Commercial Mortgage Backed Securities (CMBS)
21 Pages Posted: 27 Feb 2009 Last revised: 11 Feb 2011
Date Written: February 25, 2009
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 on 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.
Keywords: CMBS, default, structural model
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