PT  - JOURNAL ARTICLE
AU  - Yi-kang Liu
AU  - George M. Jabbour
AU  - Richard K. Green
TI  - The Performance of Option-Based Default Risk Models on Commercial Mortgages
AID  - 10.3905/jfi.2007.695286
DP  - 2007 Sep 30
TA  - The Journal of Fixed Income
PG  - 63--76
VI  - 17
IP  - 2
4099  - https://pm-research.com/content/17/2/63.short
4100  - https://pm-research.com/content/17/2/63.full
AB  - This article applies the first-passage-time approach to estimating default probabilities of commercial mortgages and empirically tests the cash flow proposition of Vandell (1995) by Receiver Operating Characteristic (ROC) technique. The focus is on comparing default predicting performance between a single trigger model and a double-trigger model. Using 17,616 lockout commercial loans issued between 1995 and 2001, we find the property value model performs the best. For mortgage underwriters, this empirical evidence suggests that while dealing with low-quality loans, liquidity risk measured by debt coverage ratio, rather than loan-to-value ratio, should be the key factor affecting borrowers' default decisions.TOPICS: CMBS and commercial mortgage loans, credit risk management, analysis of individual factors/risk premia