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A model of CMBS spreads

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The market for securitized commercial mortgages is still fairly new, dating back only to the mid-1990s. As the market developed, and both rating agencies and investors became more comfortable with the product and the associated risks, the level of credit support behind given tranches steadily declined. At the same time on-the-run spreads also declined. This paper develops a series of models of both on-the-run CMBS spreads and spreads on newly-issued CMBS. Unlike the on-the run spreads, we can observed differences in credit quality and credit support for the newly-issued securities and therefore identify the the marginal cost investors assigned to these measures of credit quality and credit support. We then use the model to see if the marginal cost assigned to these measures of MBS credit quality and credit support significantly changed after the 9/11 attacks increased the perceived risk associated with commercial real estate, the passage and extension of the Terrorism Risk Insurance Act, and the turmoil in structured credit markets in 2007.

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  • Amy Cunningham & Joseph B. Nichols, 2009. "A model of CMBS spreads," Proceedings, Federal Reserve Bank of San Francisco, issue Jan.
    • Handle: RePEc:fip:fedfpr:y:2009:i:jan:x:10
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    1. Kent Smetters, 2005. "Insuring Against Terrorism: The Policy Challenge," NBER Working Papers 11038, National Bureau of Economic Research, Inc.
    2. Ambrose, Brent W & Sanders, Anthony B, 2003. "Commercial Mortgage-Backed Securities: Prepayment and Default," The Journal of Real Estate Finance and Economics, Springer, vol. 26(2-3), pages 179-196, March-May.
    3. Qiang Fu & Michael LaCour-Little & Kerry D. Vandell, 2003. "Commercial Mortgage Prepayments Under Heterogeneous Prepayment Penalty Structures," Journal of Real Estate Research, American Real Estate Society, vol. 25(3), pages 245-476.
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    1. Contessi, Silvio & De Pace, Pierangelo & Guidolin, Massimo, 2014. "How did the financial crisis alter the correlations of U.S. yield spreads?," Journal of Empirical Finance, Elsevier, vol. 28(C), pages 362-385.

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