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

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  • Quigley, Neil
  • Boyle, Glenn
  • Guthrie, Graeme

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.

Suggested Citation

  • Quigley, Neil & Boyle, Glenn & Guthrie, Graeme, 2008. "Estimating Implied Valuation Parameters: Extension and Application to Ground Lease Rentals," Working Paper Series 19113, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    • Handle: RePEc:vuw:vuwcsr:19113
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    File URL: https://ir.wgtn.ac.nz/handle/123456789/19113
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    References listed on IDEAS

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    1. Acharya, Viral V. & Pedersen, Lasse Heje, 2005. "Asset pricing with liquidity risk," Journal of Financial Economics, Elsevier, vol. 77(2), pages 375-410, August.
    2. David Dale‐Johnson, 2001. "Long‐Term Ground Leases, the Redevelopment Option and Contract Incentives," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 29(3), pages 451-484, March.
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