Modeling exposure to losses on automobile leases

Smith, L. Douglas; Jin, Baiqiang

doi:10.1007/s11156-007-0032-0

“…Different approaches have been utilized to model the Ornstein-Uhlenbeck equation. Smith and Jin (2007) used maximum likelihood approximation, least-square estimation, and jackknife technique to assess the unknowns of the Ornstein-Uhlenbeck equation. A study by Chaiyapo and Phewchean (2017) concluded that the jackknife technique was able to recover the trend of the commodity pricing model using the OU process.…”

Section: Modelmentioning

confidence: 99%

Tailored Car Lease Contract Based on Stochastic Process

Basu

2023

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<p>In a leasing contract, a buyer pays a monthly fee to the lender for utilizing a non-consumable commodity over a given period. The monthly leasing payment depends upon the residual value at the end of the contract estimated by the lender. Therefore, the estimation of the residual value can impact the resale value of the commodity, customer attrition rate, and the firm's market competitiveness. The value of the commodity is stochastic, depending on the usage of the vehicle and accidents. The change in the value is modeled by a mean-reverting process--the Ornstein-Uhlenbeck process--which is represented by a binomial lattice. The leasing contract is tailored considering several real-world scenarios, such as accident during the lease term, trade-in for another car before lease expiry, and hand over the car after lease maturity. Based on the presented scenarios, the best offer is made to the customer to minimize the risk of the lender.</p>

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“…The inclusion of penalties in contract to avoid cancellation was studied by Giaccotto et al (2007). Smith and Jin (2007) quantified the residual value as a percent of the manufacturer's retail price. Their model shows lower residual risk may partially offset the credit risk for customers with a lower credit score.…”

Section: Commodity Depreciation and Residual Valuementioning

confidence: 99%

Tailored Car Lease Contract Based on Stochastic Process

Basu

2023

Preprint

0

View full text Add to dashboard Cite

<p>In a leasing contract, a buyer pays a monthly fee to the lender for utilizing a non-consumable commodity over a given period. The monthly leasing payment depends upon the residual value at the end of the contract estimated by the lender. Therefore, the estimation of the residual value can impact the resale value of the commodity, customer attrition rate, and the firm's market competitiveness. The value of the commodity is stochastic, depending on the usage of the vehicle and accidents. The change in the value is modeled by a mean-reverting process--the Ornstein-Uhlenbeck process--which is represented by a binomial lattice. The leasing contract is tailored considering several real-world scenarios, such as accident during the lease term, trade-in for another car before lease expiry, and hand over the car after lease maturity. Based on the presented scenarios, the best offer is made to the customer to minimize the risk of the lender.</p>

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