Commercial Mortgage Delinquency, Foreclosure and Reinstatement

provided in Appendix 1. The commercial mortgage returns are higher than the BAA corporatebond returns (0.98% versus 0.64%) but the standard deviation is also higher (3.32% versus3.04%). Figure 1 plots the excess commercial mortgage and BAA corporate bond returns.Table 3 shows the correlations across selected return series and factors. Commercialmortgage returns have the highest correlation with BAA corporate bond returns at 0.63 and thelowest correlation with appraised real estate at 0.00. REITs and stocks have the highestcorrelation shown, at 0.76. This is consistent with the prior results in the real estate literature thatidentifies the shared characteristics of stock and REIT returns, for example Ling and Naranjo(1999).5 ResultsThe testing of the multiple factor models is done using the time-series approach originated byBlack, Jensen and Scholes and employed by FF, based on equation (1). This method is used tofacilitate comparison to the FF results. The alternative method used by Chen, Roll and Ross(1986) and Ling and Naranjo (1997) is the two-stage cross-sectional approach originated by Famaand MacBeth (1972). In this method, the first stage is a series of rolling time-series regressions togenerate a series of time-variant factor sensitivities. In the second stage, a regression isperformed for every time period where the dependent variable is the returns across the portfoliosand the independent variables are the coefficients from the first stage. The results from thesecond stage are the risk premiums, which do not vary across assets.There are several reasons why this cross-sectional method is not appropriate for mystudy. First, I am not able to separate my single commercial mortgage return series into a set ofportfolios due to data limitations. In any case, it is not logical to sort commercial mortgagereturns on a size factor and a book-equity to market-equity factor since these factors have nomeaning for commercial mortgages. This is the reason that FF used the time-series method when10