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
Hauptverfasser: Shilton, Leon, Teall, John
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.
ISSN:0896-5803
2691-1175
DOI:10.1080/10835547.1994.12090749