Downward-Sloping Term Structure of Lease Rates: A Puzzle

Miki Seko (), Kazuto Sumita and Jiro Yoshida

No 2011-042, Keio/Kyoto Joint Global COE Discussion Paper Series from Keio/Kyoto Joint Global COE Program

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.

Pages: 49 pages
Date: 2012-03
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Related works:
Working Paper: Downward-sloping term structure of lease rates: a puzzle (2012)
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