The Rent Term Premium for Cancellable Leases
47 Pages Posted: 18 Mar 2012 Last revised: 22 Apr 2016
Date Written: August 12, 2015
This study analyzes the rent term premium for leases that can be cancelled by the lessee. We model the lessor’s trade-off between leasing costs and the cost of cancellation options based on the recognition that many leases are cancellable by lessees, and lease markets involve significant transaction costs. We demonstrate that, regardless of the expected future rents, the rent term structure is upward-sloping when there is no leasing cost but U-shaped when the lessor faces moderate leasing costs. Residential leases in Japan, which are all cancellable by tenants, exhibit the term structure that is consistent with our calibrated model.
Keywords: leasing, housing, asset pricing, cancellation options, term structure, expectations hypothesis, transaction costs, hedonic regression, Japan
JEL Classification: G12, G13, R31
Suggested Citation: Suggested Citation