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A heterogeneous panel cointegration‐error correction approach to modelling commercial mortgage‐backed security prices

A heterogeneous panel cointegration‐error correction approach to modelling commercial... Provides the first empirical time series analysis of commercial mortgage‐backed securities (CMBS) prices using a proprietary data set of 15 senior tranche securities. Postulates and tests the hypothesis that nonstationary CMBS and corporate bond prices are cointegrated since CMBS are priced analogous to corporate bonds. States that given the emerging status of the CMBS market, price data is limited to less than three years. To overcome the low power of unit root and cointegration methodology for short data sets, appeals to the concept of cointegration in heterogeneous panels advanced by Pedroni (1995). Claims the presence of cointegration between CMBS and corporate bond prices confirms that the stationary first difference in CMBS and corporate bond prices must be modelled in an error correction framework (ECM). Further states the sensitivity of CMBS price changes to changes in the default probability, proxied by the market value of loans to property value, is tested in a simple first order approximation ECM framework. The results suggest that senior tranche CMBS which comprise no more than 70 per cent are immune to the risk from default loss and supports the predictions in Childs et al. (1996). http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Property Finance Emerald Publishing

A heterogeneous panel cointegration‐error correction approach to modelling commercial mortgage‐backed security prices

Seow‐Eng Ong; Clark L. Maxam
Journal of Property Finance , Volume 8 (4): 19 – Dec 1, 1997
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Publisher
Emerald Publishing
Copyright
Copyright © 1997 MCB UP Ltd. All rights reserved.
ISSN
0958-868X
DOI
10.1108/09588689710190333
Publisher site
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Abstract

Provides the first empirical time series analysis of commercial mortgage‐backed securities (CMBS) prices using a proprietary data set of 15 senior tranche securities. Postulates and tests the hypothesis that nonstationary CMBS and corporate bond prices are cointegrated since CMBS are priced analogous to corporate bonds. States that given the emerging status of the CMBS market, price data is limited to less than three years. To overcome the low power of unit root and cointegration methodology for short data sets, appeals to the concept of cointegration in heterogeneous panels advanced by Pedroni (1995). Claims the presence of cointegration between CMBS and corporate bond prices confirms that the stationary first difference in CMBS and corporate bond prices must be modelled in an error correction framework (ECM). Further states the sensitivity of CMBS price changes to changes in the default probability, proxied by the market value of loans to property value, is tested in a simple first order approximation ECM framework. The results suggest that senior tranche CMBS which comprise no more than 70 per cent are immune to the risk from default loss and supports the predictions in Childs et al. (1996).

Journal

Journal of Property Finance – Emerald Publishing

Published: Dec 1, 1997

Keywords: Cointegration; Commercial property; Securities markets; Standardization

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