Valuing Commercial Mortgages: An Empirical Investigation of the Contingent‐Claims Approach to Pricing Risky Debt

Sheridan D. Titman · Walter N. Torous

247 citations0/0 files storedThe Journal of Finance

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Housing Market and Economics Stochastic processes and financial applications Credit Risk and Financial Regulations

Abstract

ABSTRACT This paper empirically investigates a contingent‐claims model of commercial mortgage pricing. We find that the magnitude of the observed default premia for a sample of nonprepayable fixed rate bullet mortgages can be explained by the contingent‐claims model. In addition, the model explains a significant proportion of the period‐to‐period changes in the default premia. However, given an assumed negative correlation between building value changes and interest rate changes, the model's risk structure tends to increase less steeply with increasing maturity than the observed risk structure.

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References

1973The Pricing of Options and Corporate Liabilities 1974ON THE PRICING OF CORPORATE DEBT: THE RISK STRUCTURE OF INTEREST RATES*1985A Theory of the Term Structure of Interest Rates 1988Theory of Financial Decision Making.1986Asymmetric Information and Risky Debt Maturity Choice 1984Contingent Claims Analysis of Corporate Capital Structures: an Empirical Investigation 1980Analyzing Convertible Bonds 2008Term Structure of Interest Rates

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1999Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options 1997Pricing Mortgage Default and Foreclosure Delay 1998Modeling the Conditional Probability of Foreclosure in the Context of Single‐Family Mortgage Default Resolutions 2003Commercial Mortgage-Backed Securities: Prepayment and Default 2018Deep Learning for Mortgage Risk 2020Deep Learning for Mortgage Risk*

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