Downward-sloping term structure of lease rates: a puzzle
AbstractA 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.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 37395.
Date of creation: 29 Feb 2012
Date of revision:
lease contracts; term structure; cancellation option; hedonic regression; residential real estate; option premium; Japan;
Other versions of this item:
- 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.
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services
- R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
- R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
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