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Institut für Financial Management

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Browsing Institut für Financial Management by Subject "Automotive lease contracts"

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    An empirical analysis of residual value risk in automotive lease contracts
    (2011) Nau, Katharina; Burghof, Hans-Peter
    The work at hand concentrates on the risk structure of lease contracts and therefore aims to give insights and support to the risk management of lease firms. The focus lies on a special and highly important type of risk in such contracts named residual value risk describing the risk arising from deviations of the actual residual value at maturity stage of the contract from the estimated one fixed in the contract at its completion. My analysis deals with automobile leases covering the major share of this market. The main objective of this work is the analysis of two research question: 1.) What determines residual values? 2.) How can residual values be predicted? On the one hand, a minimum level of predictability is necessary to manage residual value risk. That is why an identification of determinants of residual values is extremely important. The possibility to link fluctuations in residual values to changes in explanatory variables allows one to trace the pattern of residual values based on the pattern of the identified risk factors. On the other hand, residual values are not known in advance but needed at the completion of the lease contract. This is why residual values have to be predicted. These questions are assessed by an empirical analysis using the ARIMAX regression methodology. The analysis uses a sample covering monthly residual values of 17 cars in the German automobile market for the observation period from June 1992 to December 2008. The determinants of the residual values describe the market environment of used cars. Those can be classified into three man categories. The first one illustrates the overall economic situation, the second one describes the situation in the new and used car market and the third one specifies a certain car model in more detail. The empirical results give evidence that the chosen factors influence the residual values of cars. Moreover, those determinants lead to very accurate predicted residual values showing a high forecast ability. Furthermore, the empirical results and considerations are used to conduct a theoretical analysis in order to derive implications for the residual value risk management. The valuation model of McConnell and Schallheim (1983) is used on the one hand to quantify the impact of fluctuations in the underlying factors on the lease rate and, on the other hand, to analyse the effects of misspecifications in an underlying market factor on the lease rate and the value of the lease contract. These theoretical considerations give insights and support to improve the risk management of residual values in lease contracts.