Pricing of Commercial Real Estate Securities during the 2007-2009 Financial Crisis

Abstract

We study the relative and absolute pricing of CMBX contracts (commercial real estate derivatives) during the recent financial crisis. Using a structural CMBX pricing model we find little systematic mispricing relative to REIT equity and options. We do find short-term deviations from this relative pricing relationship that are statistically and economically significant. In particular, the CMBX market temporarily overreacts to news announcements. We provide evidence that this temporary mispricing is caused by price pressure due to hedging activities. Finally, an absolute pricing analysis provides no substantial evidence that CMBX contracts traded at fire sale levels during the crisis.

Keywords: Mortgage, CMBS, CMBX, REIT, Market Efficiency, Financial Crisis, Commercial Real Estate

JEL Classification: G12, G13, G14, G21