Driving Factors in Pricing European CMBS: Bond, Mortgage and Real Estate Characteristics

Abstract

This work represents a first attempt to price European commercial mortgage backed securities (CMBS) and our results are consistent with research carried out in the US market. More specifically this research intends to study the significance of bond, mortgage and property-related variables in the pricing of European CMBS, along with macro-economic and financial factors used as control variables. Particularly we define some variables to describe the underlying property portfolio and the behavior of the real estate market to test their significance in explaining CMBS spreads. Multiple linear regression analysis using a databank of A Tranches issued between 1997 and 2007 indicates a strong relationship with bond-related factors, followed by real estate and mortgage market conditions. As floater coupon tranches tend to be riskier and exhibit higher spreads, we also estimate a model using this sub-set of data only and results hold reinforcing our findings. Finally, we estimate our model for both tranches A and B and discuss main differences.

Keywords: Asset Pricing, CMBS, Derivatives

JEL Classification: G12, G14, G15