Valuing the Default Risk of Jeonse Deposit Obligations

This study aims topresent a financial model for quantitatively estimating the value of default risk in jeonse contracts. The jeonse system, inwhich tenants pay a lump-sumdeposit to the landlord and receive it back in full at the end of the contract, has long been one of the primarymeans of housing stability. However, the expansion of housing price volatility, rapid interest rate hikes, and widening regional disparities in the jeonse-to-price ratio have elevated the default risk of jeonse deposits to a significant social issue. Previous studies have identified risk factors using probability-based approaches such as logistic regressionmodels, Merton’s default model, and Cox’s proportional hazardmodel. Nonetheless, these approaches have limitations in reflecting the economic structure of the contract or the option value under uncertainty in valuing the risk itself. To address these limitations, this study models the default process of jeonse deposits as the exercise of a European put option, combiningMerton’s(1974) default model with the binomial option pricingmodel proposed by Cox, Ross, and Rubinstein(1979). In this model, the housing price is set as the underlyingasset, the jeonsedeposit as the strikeprice, and factors suchas volatility, risk-free interest rate, and contract maturity are incorporated to estimate the default risk value. Subsequently, a sensitivity analysis is conducted to examine how changes in housing price, jeonse-to-price ratio, volatility, and interest rates affect the default risk. Based on the results, the study provides practical and policy implications applicable to the design of guarantee insurance premiums, risk-based guarantee limits, anddifferentiated regulationsby region.