Title: Valuing Default and Defeasence Option for Commercial Mortgage Backed Securities
Abstract: We try to estimate default and deference probabilities of commercial mortgages via an American option pricing framework. In this framework, the borrower is assumed to default either if the price of the real estate drops below the level of the outstanding loan balance or the net operating income of the real estate is less than the periodic payments of the loan. The borrower is assumed to defease when the gain from defeasing to refinance a new project is large enough to cover the loss occurring due to defeasence. To the best of authors’ knowledge, this is the first study that simultaneously considers the defeasence and default options of a mortgage borrower.
Publication Year: 2012
Publication Date: 2012-10-01
Language: en
Type: preprint
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Cited By Count: 1
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