Featured Research

from universities, journals, and other organizations

Link between selling, leasing market prices for cars studied

Date:
February 13, 2014
Source:
University of East Anglia
Summary:
Researchers have, for the first time, modeled the relationship between variations in leasing and selling market prices, using almost 10 years of data from the US, the world’s largest automobile market. They suggest that in order to determine more accurately the monthly payments agreed in leasing contracts, firms need to take into account the prevailing selling, also known as cash, price of vehicles.

Changes in the selling prices of cars can be used to improve calculations for how much people should be paying to lease a vehicle, according to a new study.

Related Articles


Researchers from Norwich Business School at the University of East Anglia (UEA) and Athens University of Economics and Business (AUEB) have for the first time modelled the relationship between variations in leasing and selling market prices, using almost 10 years of data from the US, the world's largest automobile market. They suggest that in order to determine more accurately the monthly payments agreed in leasing contracts, firms need to take into account the prevailing selling, also known as cash, price of vehicles.

For households in developed countries the car is typically the second largest asset purchased after a house, and in the US a third of all cars sold are financed via leasing. The study, published this week in the Journal of Banking and Finance, finds that when selling prices go up in one month leasing rates tend to go down in the following months.

Despite its importance, the link between leasing and selling markets for vehicles is not yet fully understood and the standard way companies calculate leasing rates ignores any interactions between the two. The researchers say this could lead to customers paying significantly more or less a month, while the firms could be incurring losses rather than making a profit. To address this problem they have developed a new pricing approach for lease vehicles, which allows changes in the selling market prices to have an effect on leasing market prices and vehicle values at the end of the contract.

They use the example of a car worth $30,000 (USD) in the cash market which is leased for six months with a monthly finance rate of 1% and has a value of $25,000 at the end of the contract. Using actual market selling prices for a particular month, the traditional way of calculating the monthly instalment would result in the leasing firm undercharging by more than 40% per cent, or $466, a month. This is because selling prices increased significantly by over 1.5% that month and then leasing prices dropped, in line with the findings in the study, by a total of 2.61% over the next six months.

Using the new model the study predicts a 1.77% decrease in lease prices over the six months and a lease payment calculation which is much closer to the fair price, since the difference is less than 5% or $73 a month. Although in this example consumers may seem to be better off, this is not the case when cash prices drop rather than increase, which is equally likely. Leasing firms may try to deal with the uncertainty in leasing rates and their profits by charging higher monthly instalments.

Raphael Markellos, professor of finance at Norwich Business School, said: "The results suggest that we can make more accurate predictions about car leasing rates and residual values on the basis of cash prices. If the companies ignore this relationship, mistakes are more likely and sometimes these will benefit the consumer at the expense of the leasing firms, sometimes it will be the other way round. We are all much better off if we can reduce these mistakes as much as possible. This will allow firms to make better decisions which in turn can lead to significant savings for consumers who lease cars.

"Our results also have potential implications for other durable good leasing markets, which range from commercial vehicles, home appliances and computers to property, aircraft and ships. We must keep in mind that this is a huge market, since in the US alone equipment leasing and finance is estimated to be worth more than $700 billion."

The study 'Dynamic interaction between markets for leasing and selling automobiles', Dr Athanasios Andrikopoulos and Prof Raphael Markellos, is published in the Journal of Banking and Finance.


Story Source:

The above story is based on materials provided by University of East Anglia. Note: Materials may be edited for content and length.


Journal Reference:

  1. Thanos Andrikopoulos, Raphael N. Markellos. Dynamic Interaction between Markets for Leasing and Selling Automobiles. Journal of Banking and Finance., February 2014

Cite This Page:

University of East Anglia. "Link between selling, leasing market prices for cars studied." ScienceDaily. ScienceDaily, 13 February 2014. <www.sciencedaily.com/releases/2014/02/140213220342.htm>.
University of East Anglia. (2014, February 13). Link between selling, leasing market prices for cars studied. ScienceDaily. Retrieved November 22, 2014 from www.sciencedaily.com/releases/2014/02/140213220342.htm
University of East Anglia. "Link between selling, leasing market prices for cars studied." ScienceDaily. www.sciencedaily.com/releases/2014/02/140213220342.htm (accessed November 22, 2014).

Share This


More From ScienceDaily



More Science & Society News

Saturday, November 22, 2014

Featured Research

from universities, journals, and other organizations


Featured Videos

from AP, Reuters, AFP, and other news services

WFP: Ebola Risks Heightened Among Women Throughout Africa

WFP: Ebola Risks Heightened Among Women Throughout Africa

AFP (Nov. 21, 2014) Having children has always been a frightening prospect in Sierra Leone, the world's most dangerous place to give birth, but Ebola has presented an alarming new threat for expectant mothers. Duration: 00:37 Video provided by AFP
Powered by NewsLook.com
Toyota's Hydrogen Fuel-Cell Green Car Soon Available in the US

Toyota's Hydrogen Fuel-Cell Green Car Soon Available in the US

AFP (Nov. 21, 2014) Toyota presented its hydrogen fuel-cell compact car called "Mirai" to US consumers at the Los Angeles auto show. The car should go on sale in 2015 for around $60.000. It combines stored hydrogen with oxygen to generate its own power. Duration: 01:18 Video provided by AFP
Powered by NewsLook.com
Ebola: Life Without School in Guinea

Ebola: Life Without School in Guinea

AFP (Nov. 21, 2014) Following the closure of schools and universities in Guinea because of the Ebola virus, students look for temporary work or gather in makeshift classrooms to catch up on their syllabus. Duration: 02:14 Video provided by AFP
Powered by NewsLook.com
NSA Director: China Can Damage US Power Grid

NSA Director: China Can Damage US Power Grid

AP (Nov. 20, 2014) China and "one or two" other countries are capable of mounting cyberattacks that would shut down the electric grid and other critical systems in parts of the United States, according to Adm. Michael Rogers, director of the National Security Agency and hea Video provided by AP
Powered by NewsLook.com

Search ScienceDaily

Number of stories in archives: 140,361

Find with keyword(s):
Enter a keyword or phrase to search ScienceDaily for related topics and research stories.

Save/Print:
Share:

Breaking News:

Strange & Offbeat Stories


Science & Society

Business & Industry

Education & Learning

In Other News

... from NewsDaily.com

Science News

Health News

Environment News

Technology News



Save/Print:
Share:

Free Subscriptions


Get the latest science news with ScienceDaily's free email newsletters, updated daily and weekly. Or view hourly updated newsfeeds in your RSS reader:

Get Social & Mobile


Keep up to date with the latest news from ScienceDaily via social networks and mobile apps:

Have Feedback?


Tell us what you think of ScienceDaily -- we welcome both positive and negative comments. Have any problems using the site? Questions?
Mobile: iPhone Android Web
Follow: Facebook Twitter Google+
Subscribe: RSS Feeds Email Newsletters
Latest Headlines Health & Medicine Mind & Brain Space & Time Matter & Energy Computers & Math Plants & Animals Earth & Climate Fossils & Ruins