Modeling the Korean Chonsei Lease Contract

Brent William Ambrose, Sunwoong Kim

Research output: Contribution to journalReview article

24 Scopus citations

Abstract

Chonsei is a unique Korean lease contract in which the tenant pays an upfront deposit, typically about 40 to 80% of the value of the property, with no requirement for periodic rent payments. At the contract maturation, the landlord then returns the nominal value of the deposit. Since there is no legal obligation on the part of the landlord to deposit the money in an escrow account, the principal default risk associated with the chonsei contract falls on the tenant. We discuss the development and popularity of this contractual agreement in the context of the public policy initiatives, historical and institutional settings surrounding the Korean housing and housing finance market. We develop a contingent-claims model that recognizes the compound options embedded in the chonsei contract. Theoretical predictions are confirmed by an empirical analysis using monthly data from 1986 to 2000. Our analysis shows that the chonsei contract is an indigenous market response to economic conditions prevalent in Korea.

Original languageEnglish (US)
Pages (from-to)53-74
Number of pages22
JournalReal Estate Economics
Volume31
Issue number1
DOIs
StatePublished - Mar 1 2003

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All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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