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

Glenn Boyle, Graeme Guthrie, Neil Quigley
2008 Social Science Research Network  
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
more » ... ow 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. JEL Classification code: G12, R33.
doi:10.2139/ssrn.1266450 fatcat:n332qczp4fg7tf6zd5pjxenz2i