Abstract

http://ssrn.com/abstract=2346049
 


 



Very Long-Run Discount Rates


Stefano Giglio


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Matteo Maggiori


New York University (NYU) - Department of Finance; New York University (NYU); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Johannes Stroebel


New York University (NYU)

April 2014


Abstract:     
We provide direct estimates of how agents trade off immediate costs and uncertain future benefits that occur in the very long run, 100 or more years away. We exploit a unique feature of housing markets in the U.K. and Singapore, where residential property ownership takes the form of either leaseholds or freeholds. Leaseholds are temporary, pre-paid, and tradable ownership contracts with maturities between 50 and 999 years, while freeholds are perpetual ownership contracts. The difference between leasehold and freehold prices reflects the present value of perpetual rental income starting at leasehold expiry, and is thus informative about very long-run discount rates. We estimate the price discounts for varying leasehold maturities compared to freeholds and extremely long-run leaseholds via hedonic regressions using proprietary datasets of the universe of transactions in each country. Agents discount very long-run cash flows at low rates, assigning high present values to cash flows hundreds of years in the future. For example, 100-year leaseholds are valued at 10% to 15% less than otherwise identical freeholds, implying discount rates of below 2.6% for 100-year claims. Given the riskiness of rents, this suggests that both long-term risk-free discount rates and long-term risk premia are low. We show how the estimated very-long run discount rates are informative for climate change policy.

Number of Pages in PDF File: 131

Keywords: Cost-Benefit Analysis, Asset Pricing, Environmental Economics, Climate Change, Real Estate, House Prices Risk and Return

JEL Classification: G11, G12, R30

working papers series


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Date posted: October 28, 2013 ; Last revised: April 8, 2014

Suggested Citation

Giglio, Stefano and Maggiori, Matteo and Stroebel, Johannes, Very Long-Run Discount Rates (April 2014). Available at SSRN: http://ssrn.com/abstract=2346049 or http://dx.doi.org/10.2139/ssrn.2346049

Contact Information

Stefano Giglio
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Matteo Maggiori
New York University (NYU) - Department of Finance ( email )
Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
New York University (NYU) ( email )
Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Johannes Stroebel (Contact Author)
New York University (NYU) ( email )
Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States
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