A STRUCTURAL CASH FLOW AND PREPAYMENT OPEN-END MODEL FOR THE VALUATION OF NEW COMMERCIAL MORTGAGE-BACKED SECURITIES (CMBS)

Abstract

This paper introduces a structured cash flow generating process and a corresponding multi-period binomial tree valuation model for commercial mortgage-backed securities (CMBS) that are newly issued in a developed economy. There has been limited research in these circumstances, in the case of Singapore, in which the first CMBS had been issued in the later part of 2003. It is found that the senior tranche(s) are more inclined to be affected by prepayment behavior, through the potential early return of the underlying principal and the resultant change in duration.