Post by Sapphire Capital on Oct 23, 2008 22:57:46 GMT 4
Credit Risk and the Term Structure of Lease Rates: A Reduced Form Approach
Brent W. Ambrose
Pennsylvania State University
Yildiray Yildirim
Syracuse University - Martin J. Whitman School of Management
Journal of Real Estate Finance and Economics, Vol. 37, No. 3, 2008
Abstract:
Previous research either assumes default free leases or leases subject to default risk using a structural approach. However, structural credit risk models suffer from a common criticism that the firm's asset value process is unobservable. We develop a reduced form credit risk model for leases that avoids making assumptions regarding unobservable asset valuation processes. Furthermore, we assume a correlated market and credit risk that provides us with a simple analytic formula for valuing defaultable lease contracts. Numerical analysis reveals that tenant credit risk can have a substantial impact on the term structure of leases. Finally, we use the model to demonstrate the implied lease term structure for a set of retail and financial firms in the Fall of 2000.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1275921
Brent W. Ambrose
Pennsylvania State University
Yildiray Yildirim
Syracuse University - Martin J. Whitman School of Management
Journal of Real Estate Finance and Economics, Vol. 37, No. 3, 2008
Abstract:
Previous research either assumes default free leases or leases subject to default risk using a structural approach. However, structural credit risk models suffer from a common criticism that the firm's asset value process is unobservable. We develop a reduced form credit risk model for leases that avoids making assumptions regarding unobservable asset valuation processes. Furthermore, we assume a correlated market and credit risk that provides us with a simple analytic formula for valuing defaultable lease contracts. Numerical analysis reveals that tenant credit risk can have a substantial impact on the term structure of leases. Finally, we use the model to demonstrate the implied lease term structure for a set of retail and financial firms in the Fall of 2000.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1275921