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Very Long-Run Discount Rates

Stefano Giglio

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

Matteo Maggiori

Harvard University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Johannes Stroebel

New York University (NYU)

May 8, 2014

Fama-Miller Working Paper

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 99 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 more than 10% less than otherwise identical freeholds, implying discount rates below 2.6% for 100-year claims. Given the riskiness of rents, this suggests that both long-run risk-free discount rates and long-run 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: 157

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: September 12, 2014

Suggested Citation

Giglio, Stefano and Maggiori, Matteo and Stroebel, Johannes, Very Long-Run Discount Rates (May 8, 2014). Fama-Miller Working Paper. 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
Harvard University ( email )
1875 Cambridge Street
Cambridge, MA 02138
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
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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References:  113
Citations:  1

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