Estimating Implied Valuation Parameters: Extension and Application to Ground Lease Rentals

15 Pages Posted: 11 Sep 2008

See all articles by Glenn Boyle

Glenn Boyle

University of Canterbury - Economics and Finance; Sapere Research Group

Graeme Guthrie

Victoria University of Wellington - School of Economics & Finance

Neil Quigley

Victoria University of Wellington - Faculty of Commerce and Administration

Date Written: September 11, 2008

Abstract

A problem that often arises in applied finance is one where decision-makers need to choose a value for some parameter that will affect the cash flows between two parties, such as a rental rate or an exercise price. Because the values of the cash flows also depend on various unobservable parameters, identifying the value of the policy parameter that achieves the desired allocation between the parties is no simple task, often resulting in disputes and the invocation of ad-hoc approaches. We show how this problem can be solved using an extension of the well-known 'implied volatility' technique from option pricing, and apply it to the determination of equilibrium rental rates on ground leases of commercial land.

Keywords: valuation, implied parameters, leasing, land, rental rate

JEL Classification: G12, R33

Suggested Citation

Boyle, Glenn and Guthrie, Graeme and Quigley, Neil, Estimating Implied Valuation Parameters: Extension and Application to Ground Lease Rentals (September 11, 2008). Available at SSRN: https://ssrn.com/abstract=1266450 or http://dx.doi.org/10.2139/ssrn.1266450

Glenn Boyle (Contact Author)

University of Canterbury - Economics and Finance ( email )

Private Bag 4800
Christchurch
New Zealand

Sapere Research Group ( email )

Level 9, Pencarrow House
1 Willeston St
Wellington, 6140
New Zealand

Graeme Guthrie

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6140
New Zealand
64 4 463 5763 (Phone)

Neil Quigley

Victoria University of Wellington - Faculty of Commerce and Administration ( email )

Wellington 6001
New Zealand

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