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.
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 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 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
This paper has been announced in the following NEP Reports:
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.:
- Richard Stanton & Nancy Wallace, 2009. "An Empirical Test of a Contingent Claims Lease Valuation Model," Journal of Real Estate Research, American Real Estate Society, vol. 31(1), pages 1-26.
- Marshall E. Blume & Donald B. Keim, . "The Valuation of Callable Bonds," Rodney L. White Center for Financial Research Working Papers 14-89, Wharton School Rodney L. White Center for Financial Research.
- Eric Clapham & �ke Gunnelin, 2003. "Rental Expectations and the Term Structure of Lease Rates," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 31(4), pages 647-670, December.
- McConnell, John J. & Schallheim, James S., 1983. "Valuation of asset leasing contracts," Journal of Financial Economics, Elsevier, vol. 12(2), pages 237-261, August.
- Iwata, Shinichiro, 2002. "The Japanese Tenant Protection Law and Asymmetric Information on Tenure Length," Journal of Housing Economics, Elsevier, vol. 11(2), pages 125-151, June.
- Agarwal, Sumit & Ambrose, Brent W. & Huang, Hongming & Yildirim, Yildiray, 2011. "The Term Structure of Lease Rates with Endogenous Default Triggers and Tenant Capital Structure: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(02), pages 553-584, April.
- Clapham, Eric & Gunnelin, Åke, 2003. "Rental Expectations and the Term Structure of Lease Rates," SIFR Research Report Series 16, Institute for Financial Research.
- Steven R. Grenadier, 2005. "An Equilibrium Analysis of Real Estate Leases," The Journal of Business, University of Chicago Press, vol. 78(4), pages 1173-1214, July.
- 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, vol. 37(3), pages 281-298, October.
- Miki Seko & Kazuto Sumita, 2007. "Japanese Housing Tenure Choice and Welfare Implications after the Revision of the Tenant Protection Law," The Journal of Real Estate Finance and Economics, Springer, vol. 35(3), pages 357-383, October.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.