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Rental Expectations and the Term Structure of Lease Rates

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  • Eric Clapham
  • �ke Gunnelin
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    Abstract

    We consider the term structure of lease rates in a general setting where both rents and interest rates are stochastic. The framework is applicable to any leasing market, but we focus on real estate. We find that the ``expectations hypothesis", that is, forward rates are unbiased estimators of future rents, requires similar assumptions as in interest rate theory to hold. To study bias magnitude, simulations are performed using a parameterization of the general framework. Different realistic values for risk aversion and interest rate stochastics can generate widely different shapes of the term structure, holding objective expectations constant. Thus an expected increase in rent is consistent with a downward-sloping term structure and vice versa. Copyright 2003 by the American Real Estate and Urban Economics Association

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    Bibliographic Info

    Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

    Volume (Year): 31 (2003)
    Issue (Month): 4 (December)
    Pages: 647-670

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    Handle: RePEc:bla:reesec:v:31:y:2003:i:4:p:647-670

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    Cited by:
    1. Miki Seko & Kazuto Sumita & Jiro Yoshida, 2012. "Downward-Sloping Term Structure of Lease Rates: A Puzzle," Keio/Kyoto Joint Global COE Discussion Paper Series, Keio/Kyoto Joint Global COE Program 2011-042, Keio/Kyoto Joint Global COE Program.
    2. Shaun Bond & Pavlos Loizou & Patrick McAllister, 2008. "Lease Maturity and Initial Rent: Is There a Term Structure for UK Commercial Property Leases?," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 36(4), pages 451-469, May.
    3. Brent Ambrose & Yildiray Yildirim, 2008. "Credit Risk and the Term Structure of Lease Rates: A Reduced Form Approach," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 37(3), pages 281-298, October.
    4. Golbeck, Steven & Linetsky, Vadim, 2013. "Asset financing with credit risk," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 43-59.

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