SIFR Research Report Series, Institute for Financial Research
Rental Expectations and the Term Structure of Lease Rates
() and Åke Gunnelin
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; (follow links to similar papers)
JEL-Codes: G00; R00; (follow links to similar papers)
26 pages, October 13, 2003
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