Option-Based Prediction of Commercial Mortgage Defaults
Underwriters set loan-to-value ratios and loan contract interest rates of uninsured commercial mortgages to anticipate the likelihood of subsequent default. The results of the use of a modified Black-Scholes option model suggest that loan-to-value ratios are bound from below by borrowers 9 desires t...
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Veröffentlicht in: | The Journal of real estate research 1994-04, Vol.9 (2), p.219-236 |
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Hauptverfasser: | , |
Format: | Artikel |
Sprache: | eng |
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Zusammenfassung: | Underwriters set loan-to-value ratios and loan contract interest rates of uninsured commercial mortgages to anticipate the likelihood of subsequent default. The results of the use of a modified Black-Scholes option model suggest that loan-to-value ratios are bound from below by borrowers 9 desires to maximize project leverage in a limited liability setting and constrained from above by lenders' requirement to originate loans with institutional-grade (Baa) contract interest rates. Given the prevailing risk-free rate and the investment-grade rate, this model at the time of mortgage origination predicts the possibility of default for a new commercial mortgage. The model is empirically verified with ACLI data for 1968-89. |
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ISSN: | 0896-5803 2691-1175 |
DOI: | 10.1080/10835547.1994.12090749 |