Liquidity Risk and CMBX Microstructure

In this paper we introduce a generalizable method to estimate daily risk decompositions of default, interest rate, liquidity and excess liquidity from previously simulated reduced form monthly risk decompositions. Our method generates these measures for CMBX. To assess liquidity estimates, we compare our risk decomposition measures of liquidity to classical microstructure effective bid-ask spreads, daily. We find our measures to be significant in explaining effective bid-ask spreads over twelve years of daily history and in twenty-day forecasts. This is the first paper in the literature to focus on CMBX price formation with dual techniques of liquidity estimation