An Empirical Test of a Contingent Claims Lease Valuation Model
AbstractDespite the importance of leases in the US economy, and the existence of several theoretical lease pricing models, there has been little systematic attempt to estimate these models. This paper proposes a simple no-arbitrage based lease pricing model, and estimates it using a large proprietary data set of leases on several property types. We also define a new measure, the Option-Adjusted Lease Spread, or OALS (analogous to an option’s implied volatility, or a mortgage-backed security’s Option-Adjusted Spread), that allows us to compare leases with different maturities and contract terms on a consistent basis. We find sizeable pricing errors that cannot be explained using interest rates, lease maturity, or information on the options embedded in the contracts. This suggests either that there are significant mispricings in the market for real estate leases, or that lease terms depend heavily on unobservable, property-specific characteristics.
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Bibliographic InfoArticle provided by American Real Estate Society in its journal journal of Real Estate Research.
Volume (Year): 31 (2009)
Issue (Month): 1 ()
Contact details of provider:
Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
Web page: http://www.aresnet.org/
Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
Find related papers by JEL classification:
- L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services
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