Actuarial Outpost
 
Go Back   Actuarial Outpost > Actuarial Discussion Forum > Finance - Investments
FlashChat Actuarial Discussion Preliminary Exams CAS/SOA Exams Cyberchat Around the World Suggestions

Actuarial Jobs by State

New York  New Jersey  Connecticut  Massachusetts 
California  Florida  Texas  Illinois  Colorado


Finance - Investments Sub-forum: Non-Actuarial Personal Finance/Investing

Reply
 
Thread Tools Search this Thread Display Modes
  #1  
Old 01-31-2017, 10:21 PM
kazh's Avatar
kazh kazh is offline
Member
SOA AAA
 
Join Date: Nov 2001
Location: a long nap
Favorite beer: A & W Root
Posts: 5,071
Default CMBS Default Risk

I see averages about 13%. Then I read of current defaults in the range of 4-8%. For cashflow testing, what is a reasonable CMBS default rate to assume?
__________________
awake again
Reply With Quote
  #2  
Old 02-01-2017, 04:37 AM
jas66Kent jas66Kent is offline
Member
SOA
 
Join Date: May 2012
Location: London
Favorite beer: Corona :)
Posts: 22,630
Default

Depends on the credit rating of the CMBS.
Reply With Quote
  #3  
Old 02-01-2017, 05:36 AM
bitter buffalo's Avatar
bitter buffalo bitter buffalo is offline
Member
SOA
 
Join Date: Aug 2010
Favorite beer: trappistes rochefort 10
Posts: 1,012
Default

also depends on the time horizon you're interested in. google "S&P Global Structured Finance Default Study" - that should help.
__________________
It may be the coldest day of
the year, what does he think of
that? I mean, what do I? And if I do,
perhaps I am myself again.
Reply With Quote
  #4  
Old 02-01-2017, 05:57 AM
jas66Kent jas66Kent is offline
Member
SOA
 
Join Date: May 2012
Location: London
Favorite beer: Corona :)
Posts: 22,630
Default

You basically have to make two modifications to the cashflows:

1. Adjust for the probability of default
2. Adjust for the cost of a downgrade

That will capture the inherent credit risk of the CMBS.
Reply With Quote
  #5  
Old 02-01-2017, 07:18 AM
bitter buffalo's Avatar
bitter buffalo bitter buffalo is offline
Member
SOA
 
Join Date: Aug 2010
Favorite beer: trappistes rochefort 10
Posts: 1,012
Default

you'll probably also need to consider severity of losses given default (LGDs) when adjusting your cash flows.

on-topic but maybe not terribly relevant for the OP: i think CMBS are typically tranched. tail credit risk for tranched structured securities should be viewed differently than for comparably-rated (non-tranched) corporate bonds:

- highly-rated tranched securities will suffer credit losses only when the underlying collateral pools are wiped out, and due to the protection offered by subordinate tranches, this will typically happen during systemic macro events when many tranched securities will default at the same time. corporate bonds, on the other hand, are more susceptible to sporadic defaults resulting from idiosyncratic, firm-specific events. in other words, corporate bond credit risk is easier to diversify than tranched security credit risk.

- tranched structures are more susceptible to very high LGDs because of the reason noted previously - default will tend to happen during macro events which are severe enough to wipe out all subordinate layers. defaulted corporate bonds will tend to have lower LGDs, with bankruptcy proceedings split pro-rata among pari-passu claims.
__________________
It may be the coldest day of
the year, what does he think of
that? I mean, what do I? And if I do,
perhaps I am myself again.
Reply With Quote
  #6  
Old 02-01-2017, 07:51 AM
jas66Kent jas66Kent is offline
Member
SOA
 
Join Date: May 2012
Location: London
Favorite beer: Corona :)
Posts: 22,630
Default

You will also have to factor in a recovery rate based on the specific tranche.
Reply With Quote
  #7  
Old 02-03-2017, 04:13 PM
kazh's Avatar
kazh kazh is offline
Member
SOA AAA
 
Join Date: Nov 2001
Location: a long nap
Favorite beer: A & W Root
Posts: 5,071
Default

All the comments are helpful, thank you. It leaves me either trusting the secretive investment group that says their high-return CMBS is of the highest quality, comparable to NAIC 1, but don't want to disclose their private niche. Maybe I'll gauge the reaction to a caveat along with a range of results using default risks from 4% to 13%.
__________________
awake again
Reply With Quote
  #8  
Old 02-03-2017, 04:24 PM
jas66Kent jas66Kent is offline
Member
SOA
 
Join Date: May 2012
Location: London
Favorite beer: Corona :)
Posts: 22,630
Default

They won't tell you the actual composition of the CMBS in terms of the credit quality of the actual mortgages that are inside it?
Reply With Quote
  #9  
Old 02-07-2017, 12:57 PM
MathGeek92 MathGeek92 is offline
Member
 
Join Date: Jul 2004
Posts: 714
Default

tell us one CUSIP number.. I'll research and get back to you

Hey.. give me a CUSIP... The geek in me wants to research this.

Last edited by MathGeek92; 03-24-2017 at 04:22 PM..
Reply With Quote
  #10  
Old 03-15-2017, 01:05 AM
bitter buffalo's Avatar
bitter buffalo bitter buffalo is offline
Member
SOA
 
Join Date: Aug 2010
Favorite beer: trappistes rochefort 10
Posts: 1,012
Default

speaking of CMBS default risk...

https://www.bloomberg.com/news/artic...-credit-market

"A small but growing group of firms are positioning to profit from a collapse that could spur a wave of defaults. Their target: securities backed not by subprime mortgages, but by loans taken out by beleaguered mall and shopping center operators."
__________________
It may be the coldest day of
the year, what does he think of
that? I mean, what do I? And if I do,
perhaps I am myself again.
Reply With Quote
Reply

Tags
aom, cashflow testing, cmbs, default, risk

Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off


All times are GMT -4. The time now is 06:08 PM.


Powered by vBulletin®
Copyright ©2000 - 2018, Jelsoft Enterprises Ltd.
*PLEASE NOTE: Posts are not checked for accuracy, and do not
represent the views of the Actuarial Outpost or its sponsors.
Page generated in 0.39495 seconds with 9 queries