Rental Expectations and the Term Structure of Lease Rates

Eric Clapham () and Åke Gunnelin ()
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Eric Clapham: Stockholm School of Economics
Åke Gunnelin: Swedish Institute for Financial Research, Postal: Royal Institute of Technology

No 16, SIFR Research Report Series from Institute for Financial Research

Abstract: 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.

Keywords: Term structure of lease rates; Rental expectations; Expectations hypothesis; Lease valuation (search for similar items in EconPapers)
JEL-codes: G00 R00 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2003-10-13
New Economics Papers: this item is included in nep-cfn, nep-geo and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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