Working Paper: NBER ID: w7622
Authors: Brent W. Ambrose; Patric H. Hendershott; Malgorzata M. Klosek
Abstract: This paper presents a stochastic pricing model of a unique, path-dependent lease instrument common in the United Kingdom and numerous commonwealth countries, the upward-only adjusting lease. In this lease, the rental rate is fixed at lease commencement but will be reset to the market rate at predetermined intervals (usually every five years) if it exceeds the contract rent. Numerical results indicate how the initial coupon rate should be set relative to that on a symmetric up-and-downward adjusting variable rate' lease under various economic conditions (level of real interest rates and expected drift and volatility of the underlying rental service flow). We also consider the calculation of effective rents when free rent periods are given during either a market collapse or a steady-state drift.
Keywords: No keywords provided
JEL Codes: R0; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| expected market rents at adjustment dates (R31) | initial coupon rate of an upward-only adjusting lease (E43) |
| stochastic nature of the underlying service flow (C69) | initial coupon rate of an upward-only adjusting lease (E43) |
| drift is low and volatility is high (C58) | initial rent discount on upward-only leases (R21) |
| real risk-free interest rate increases (E43) | initial rent discount on upward-only leases (R21) |