Extreme Events and the Copula Pricing of Commercial Mortgage-Backed Securities

Extreme Events and the Copula Pricing of Commercial Mortgage-Backed Securities Commercial mortgage-backed securities (CMBS), as a portfolio-based financial product, have gained great popularity in financial markets. This paper extends Childs, Ott and Riddiough’s (J Financ Quant Anal, 31(4), 581–603, 1996) model by proposing a copula-based methodology for pricing CMBS bonds. Default on underlying commercial mortgages within a pool is a crucial risk associated with CMBS transactions. Two important issues associated with such default—extreme events and default dependencies among the mortgages—have been identified to play crucial roles in determining credit risk in the pooled commercial mortgage portfolios. This article pays particular attention to these two issues in pricing CMBS bonds. Our results show the usefulness and potential of copula-based models in pricing CMBS bonds, and the ability of such models to correctly price CMBS tranches of different seniorities. It is also important to sufficiently consider complex default dependence structure and the likelihood of extreme events occurring in pricing various CMBS bonds. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Real Estate Finance and Economics Springer Journals

Extreme Events and the Copula Pricing of Commercial Mortgage-Backed Securities

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Springer US
Copyright © 2008 by Springer Science+Business Media, LLC
Economics; Regional/Spatial Science; Financial Services
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