IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Rental Expectations and the Term Structure of Lease Rates

  • Clapham, Eric

    ()

    (Stockholm School of Economics)

  • Gunnelin, Åke

    ()

    (Swedish Institute for Financial Research)

Registered author(s):

    We consider the term structure of lease rates in a general setting where both the interest rate and the short rent are stochastic. Our framework is applicable to any leasing market, but we focus on real estate. We find that the “expectations hypothesis” of lease rates, i.e. that the forward rent is an unbiased estimator of the future short rent, requires similar assumptions as in interest rate theory to hold. To study the magnitude of the bias we parameterize our general framework. The simulations show that different realistic parameter values for risk aversion and interest rate stochastics can generate widely different shapes of the rental term structure, holding the objective rental expectations constant. As a result, an expected increase in rent may very well be consistent with a downward-sloping term structure and vice versa.

    If 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.

    File URL: http://www.sifr.org/PDFs/sifr-wp16.pdf
    Download Restriction: no

    Paper provided by Institute for Financial Research in its series SIFR Research Report Series with number 16.

    as
    in new window

    Length: 26 pages
    Date of creation: 13 Oct 2003
    Date of revision:
    Handle: RePEc:hhs:sifrwp:0016
    Contact details of provider: Postal: Institute for Financial Research Drottninggatan 89, SE-113 60 Stockholm, Sweden
    Phone: +46-8-728-5120
    Fax: +46-8-728-5130
    Web page: http://www.sifr.org/
    Email:


    More information through EDIRC

    References listed on IDEAS
    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.:

    as in new window
    1. Miller, Merton H & Upton, Charles W, 1976. "Leasing, Buying, and the Cost of Capital Services," Journal of Finance, American Finance Association, vol. 31(3), pages 761-86, June.
    2. Duffie, Darrell & Singleton, Kenneth J, 1997. " An Econometric Model of the Term Structure of Interest-Rate Swap Yields," Journal of Finance, American Finance Association, vol. 52(4), pages 1287-1321, September.
    3. 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.
    4. McConnell, John J. & Schallheim, James S., 1983. "Valuation of asset leasing contracts," Journal of Financial Economics, Elsevier, vol. 12(2), pages 237-261, August.
    5. Patric H. Hendershott & Colin M. Lizieri & George A. Matysiak, 1999. "The Workings of the London Office Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 27(2), pages 365-387.
    6. Andrew W. Lo & Jiang Wang, 1994. "Implementing Option Pricing Models When Asset Returns Are Predictable," NBER Working Papers 4720, National Bureau of Economic Research, Inc.
    7. Steven R. Grenadier, 2003. "An Equilibrium Analysis of Real Estate," NBER Working Papers 9475, National Bureau of Economic Research, Inc.
    8. Grenadier, Steven R., 1996. "Leasing and credit risk," Journal of Financial Economics, Elsevier, vol. 42(3), pages 333-364, November.
    9. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    10. Grenadier, Steven R., 1995. "Valuing lease contracts A real-options approach," Journal of Financial Economics, Elsevier, vol. 38(3), pages 297-331, July.
    11. Gunnelin, Åke & Söderberg, Bo, 2002. "Term Structures in the Office Rental Market in Stockholm," SIFR Research Report Series 6, Institute for Financial Research.
    12. Miceli, Thomas J. & Sirmans, C. F., 1999. "Tenant Turnover, Rental Contracts, and Self-Selection," Journal of Housing Economics, Elsevier, vol. 8(4), pages 301-311, December.
    13. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1981. "A Re-examination of Traditional Hypotheses about the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 36(4), pages 769-99, September.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:hhs:sifrwp:0016. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anki Helmer)

    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.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.