A test of integration and cointegration of commercial mortgage rates

Little empirical work examines the extent to which commercial mortgage mark ets are integrated into broader capital markets. We use time series data on commercial mortgage yields and yields on comparable-maturity Treasury secu rities to identify a long-run cointegrating relationship between the two yi eld series. Our empirical evidence suggest that, while the yield on commerc ial mortgage is cointegrated with that on comparable-maturity Treasury secu rities, the cointegrating relationship is far less than that found between the yield on residential mortgage rates and that on comparable-maturity Tre asury securities during 1980-1990 time period. However, our results also sh ow that the spate of commercial mortgage securitization that began in early 1991 may have been a market-integrating force and caused the commercial mo rtgage market to become more integrated into broader capital markets. Indee d, our results suggest that changes in capital market rates are now much mo re rapidly reflected in commercial mortgage rates than in the 1980-1990 tim e period, although there is a lag.