The Performance of Commercial Mortgages

Posted: 28 Jan 1999

See all articles by Brian A. Ciochetti

Brian A. Ciochetti

Independent

Kerry D. Vandell

University of California, Irvine - Paul Merage School of Business; University of California, Irvine School of Law

Abstract

This study examines the return characteristics of a large, well diversified commercial mortgage portfolio. Mortgage specific cash flow histories are constructed for 2,480 loans originated over the period 1974 through 1990, and a contingent-claims approach to pricing risky debt is used to estimate inter-temporal market values. Quarterly holding period returns are compared across selected mortgage groups and to alternate asset classes. Our findings suggest that both mortgage returns and volatility of return are comparable to other forms of fixed-income assets over the study period. Implied property price volatility is found to average 17%, a result significantly higher than reported in earlier studies. While mortgage returns are found to vary by property type and region of origin, cross correlation of returns are found to be high, illustrating the systematic impact of interest rates on the performance of commercial mortgages over the period 1974 through 1990. However, an increase in credit risk in the latter years of the study suggests that diversification may be a worthwhile objective for holders of these assets. We do not find evidence to suggest that abnormal returns were earned on commercial mortgage portfolios over the study period.

JEL Classification: G12

Suggested Citation

Ciochetti, Brian A. and Vandell, Kerry D., The Performance of Commercial Mortgages. Available at SSRN: https://ssrn.com/abstract=145353

Kerry D. Vandell

University of California, Irvine - Paul Merage School of Business ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States

University of California, Irvine School of Law ( email )

401 E. Peltason Dr.
Ste. 1000
Irvine, CA 92697-1000
United States

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