Seko, Miki and Sumita, Kazuto and Yoshida, Jiro (2012): Downward-sloping term structure of lease rates: a puzzle.
Download (1MB) | Preview
A model of the term structure of lease rates in a frictionless economy is developed and its predictions are compared with data on residential leases in Japan. The model shows that the initial lease rate for a cancellable lease must be set higher than that for a non-cancellable lease because the former rate will be repeatedly adjusted downward when the market rent decreases. More importantly, the term structure of lease rates is always upward-sloping for cancellable leases. Empirical findings show a sharp contrast with the theory. Fixed-term lease rates are often higher than open-ended long-term lease rates. Moreover, in the fixed-term lease sample, the term structure of lease rates is downward-sloping. The term structure is also heterogeneous by tenant’s income.
|Item Type:||MPRA Paper|
|Original Title:||Downward-sloping term structure of lease rates: a puzzle|
|Keywords:||lease contracts, term structure, cancellation option, hedonic regression, residential real estate, option premium, Japan|
|Subjects:||E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects
L - Industrial Organization > L8 - Industry Studies: Services > L85 - Real Estate Services
R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R3 - Real Estate Markets, Production Analysis, and Firm Location > R31 - Housing Supply and Markets
R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R2 - Household Analysis > R21 - Housing Demand
|Depositing User:||Jiro Yoshida|
|Date Deposited:||16. Mar 2012 14:30|
|Last Modified:||20. Feb 2013 05:27|
Agarwal, S., B.W. Ambrose, H. Huang and Y. Yildirim. 2011. The Term Structure of Lease Rates with Endogenous Default Triggers and Tenant Capital Structure: Theory and Evidence. Journal of Financial and Quantitative Analysis 46(2): 553-584.
Ambrose, B. W. and Y. Yildirim. 2008. Credit Risk and the Term Structure of Lease Rates: A Reduced Form Approach. Journal of Real Estate Finance and Economics 37: 281–298.
Blume, M. E. and D. B. Keim. 1988. The Valuation of Callable Bonds. Working paper 14-89, Rodney White Center for Financial Research, The Wharton School.
Clapham, E. and A. Gunnelin. 2003. Rental Expectations and the Term Structure of Lease Rates. Real Estate Economics, American Real Estate and Urban Economics Association 31(4): 647-670.
Grenadier, S. R. 1995. Valuing Lease Contracts: A Real-options Approach. Journal of Financial Economics 38(3): 297-331.
Grenadier, S. R. 2005. An Equilibrium Analysis of Real Estate Leases. Journal of Business 78(4): 1173-1214.
Iwata, S. 2002. The Japanese Tenant Protection Law and Asymmetric Information on Tenure Length. Journal of Housing Economics 11(2): 125-151.
McConnell, J. J. and J.S. Schallheim. 1983. Valuation of Asset Leasing Contracts. Journal of Financial Economics 12(2): 237-261.
Seko, M. and K. Sumita. 2007. Japanese Housing Tenure Choice and Welfare Implications after the Revision of the Tenant Protection Law. Journal of Real Estate Finance and Economics 35(3): 357-383.
Stanton, R. and N. Wallace. 2009. An Empirical Test of a Contingent Claims Lease Valuation Model. Journal of Real Estate Research 31(1): 1-26.