Commercial Mortgage Delinquency, Foreclosure and Reinstatement

examining bond returns. Second, since N is only 83 (since the data is quarterly), there are simplynot enough observations to create a meaningful set of rolling factor coefficients. Third, thepurpose of my study is to compare a model for commercial mortgages against other assets,especially corporate bonds. The second stage results from a cross-sectional approach, the riskpremiums, do not vary across assets, and so do not provide information to distinguish assets. Forthese reasons, the time-series method is preferable.The results from the regressions of the excess returns of the selected return series onfactor variables are in Table 4. Standard errors are adjusted based on the Huber-White methodfor robustness. Three specifications are shown, where the first one is based on the FF factors andthe second on the Ling-Naranjo real estate factors. The third specification is the FF factors withthe addition of the factor of growth in personal consumption.In the first specification, where the FF factors are used, I confirm that the 3 factors, stockmarket return, size factor and book-to-market equity factor describe returns on the selected stockportfolio very well. All three factors are significant at 1% and the R 2 is 88%. In addition, Iconfirm FF’s findings for corporate bonds, where the two factors, term spread and default spreadare significant. REITs are also well described by the FF factors, but appraised real estate is not(R 2 is only 5% and only the term spread is significant).Since commercial mortgages have similar coefficients to corporate bonds on all factorsunder this specification, a test is performed to determine whether the sensitivity of commercialmortgage returns and corporate bond returns are statistically different. A dummy variable iscreated and is set to 0 if the returns are corporate bonds and 1 if commercial mortgages. Tocreate a fully interacted model, each factor is multiplied by this dummy variable. The estimationis performed with the returns (both commercial mortgage and corporate bonds) on the factors andthe dummy-interacted factors. The coefficients on the factors will be identical to those obtainedfor corporate bonds alone, and the coefficients on the dummy-interacted factors will be equal tothe difference between the corporate bond sensitivity and the commercial mortgage sensitivity.11