PT - JOURNAL ARTICLE
AU - Chervachidze, Serguei
AU - Gallagher, Mark
AU - Wheaton, William C.
TI - What’s in a Loan Yield? <em>The Construction of a Hedonic Index of Yields for Commercial Real Estate Mortgages</em>
AID - 10.3905/jpm.2015.41.6.126
DP - 2015 Sep 30
TA - The Journal of Portfolio Management
PG - 126--139
VI - 41
IP - 6
4099 - http://jpm.pm-research.com/content/41/6/126.short
4100 - http://jpm.pm-research.com/content/41/6/126.full
AB - In this article, the authors investigate the utility of using a hedonic model in constructing an index of yields on commercial mortgage loans. They use a large unique proprietary dataset of mortgage originations from 2000Q3–2012Q4 to construct a hedonic model of yields as a function of loan characteristics as well as time effects. The authors then use the hedonic model to construct a constant-quality index of mortgage yields and test whether the index performs better in uncovering underlying equilibrium relationships with other economy-wide yield variables than a simple average of yields. They find evidence that is strongly in favor of a hedonic index. Finally, the authors build a forecasting model of the hedonic index as a function of a widely available index of corporate bond yields and test the forecasting performance of the model. The major finding is that the index works well in a forecasting model and lends itself readily to forecasting applications.