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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
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
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Xavier Gabaix & Arvind Krishnamurthy & Olivier Vigneron, 2007.
"Limits of Arbitrage: Theory and Evidence from the Mortgage-Backed Securities Market,"
Journal of Finance,
American Finance Association, vol. 62(2), pages 557-595, 04.
- Xavier Gabaix & Arvind Krishnamurthy & Olivier Vigneron, 2005. "Limits of Arbitrage: Theory and Evidence from the Mortgage-Backed Securities Market," NBER Working Papers 11851, National Bureau of Economic Research, Inc.
- Olivier Vigneron, & Xavier Gabaix & Arvind Krishnamurthy, 2004. "Limits of Arbitrage: Theory and Evidence from the Mortgage-Backed Securities Market," Econometric Society 2004 North American Summer Meetings 430, Econometric Society.
- Hendershott, Patric H & Ward, Charles W R, 2003.
"Valuing and Pricing Retail Leases with Renewal and Overage Options,"
The Journal of Real Estate Finance and Economics,
Springer, vol. 26(2-3), pages 223-40, March-May.
- Patric H. Hendershott & Charles W.R. Ward, 2002. "Valuing and Pricing Retail Leases with Renewal and Overage Options," NBER Working Papers 9214, National Bureau of Economic Research, Inc.
- Wheaton William C. & Torto Raymond G., 1994. "Office Rent Indices and Their Behavior over Time," Journal of Urban Economics, Elsevier, vol. 35(2), pages 121-139, March.
- McConnell, John J. & Schallheim, James S., 1983. "Valuation of asset leasing contracts," Journal of Financial Economics, Elsevier, vol. 12(2), pages 237-261, August.
- Webb, R. Brian & Fisher, Jeffrey D., 1996. "Development of an Effective Rent (Lease) Index for the Chicago CBD," Journal of Urban Economics, Elsevier, vol. 39(1), pages 1-19, January.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Peter ENGLUND & Åke GUNNELIN & Martin HOESLI & Bo SÖDERBERG, 2002.
"Implicit Forward Rents as Predictors of Future Rents,"
FAME Research Paper Series
rp59, International Center for Financial Asset Management and Engineering.
- Peter Englund & �ke Gunnelin & Martin Hoesli & Bo Söderberg, 2004. "Implicit Forward Rents as Predictors of Future Rents," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(2), pages 183-215, 06.
- Englund, Peter & Gunnelin, Åke & Hoesli, Martin & Söderberg, Bo, 2002. "Implicit Forward Rents as Predictors of Future Rents," SIFR Research Report Series 12, Institute for Financial Research.
- Ambrose, Brent W & Hendershott, Patric H & Klosek, Malgorzata, 2002.
"Pricing Upward-Only Adjusting Leases,"
The Journal of Real Estate Finance and Economics,
Springer, vol. 25(1), pages 33-49, July.
- Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
- Schallheim, James S & McConnell, John J, 1985. " A Model for the Determination of "Fair" Premiums on Lease Cancellation Insurance Policies," Journal of Finance, American Finance Association, vol. 40(5), pages 1439-57, December.
- John L. Glascock & Shirin Jahanian & C. F. Sirmans, 1990. "An Analysis of Office Market Rents: Some Empirical Evidence," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 18(1), pages 105-119.
- Grenadier, Steven R., 1995. "Valuing lease contracts A real-options approach," Journal of Financial Economics, Elsevier, vol. 38(3), pages 297-331, July.
- William N. Goetzmann & Jonathan E. Ingersoll, Jr. & Stephen A. Ross, 2004.
"High Water Marks,"
Yale School of Management Working Papers
ysm22, Yale School of Management.
- Schallheim, James S. & Johnson, Ramon E. & Lease, Ronald C. & McConnell, John J., 1987. "The determinants of yields on financial leasing contracts," Journal of Financial Economics, Elsevier, vol. 19(1), pages 45-67, September.
- Benjamin, John D. & Boyle, Glenn W. & Sirmans, C. F., 1992. "Price discrimination in shopping center leases," Journal of Urban Economics, Elsevier, vol. 32(3), pages 299-317, November.
- Seko, Miki & Sumita, Kazuto & Yoshida, Jiro, 2012.
"Downward-sloping term structure of lease rates: a puzzle,"
37395, University Library of Munich, Germany.
- Miki Seko & Kazuto Sumita & Jiro Yoshida, 2012. "Downward-Sloping Term Structure of Lease Rates: A Puzzle," Keio/Kyoto Joint Global COE Discussion Paper Series 2011-042, Keio/Kyoto Joint Global COE Program.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (JRER Graduate Assistant/Webmaster).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.