Downward-sloping term structure of lease rates: a puzzle

Miki Seko, Kazuto Sumita and Jiro Yoshida

MPRA Paper from University Library of Munich, Germany

Abstract: A 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.

Keywords: lease contracts; term structure; cancellation option; hedonic regression; residential real estate; option premium; Japan (search for similar items in EconPapers)
JEL-codes: E43 L85 R21 R31 (search for similar items in EconPapers)
Date: 2012-02-28
New Economics Papers: this item is included in nep-mac
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Related works:
Working Paper: Downward-Sloping Term Structure of Lease Rates: A Puzzle (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:37395

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