Weibull option Greeks for managing residual value risk in automotive finance

Seok Bin Ko

Journal of Derivatives and Quantitative Studies: ????????????, 2026, vol. 34, issue 2, 128-142

Abstract: This study proposes a Weibull-based framework for managing residual value (RV) risk in automotive leasing and demonstrates its direct applicability to key business decisions. Unlike lognormal option models, the Weibull specification captures the asymmetric and fat-tailed nature of used-car values, or more broadly, depreciating asset values, enabling finance companies to quantify exposures more realistically. The framework embeds option-theoretic sensitivities into five operational metrics, including the offset budget, offer-timing score, volatility guardrail, scale guardrail and composite distributional alert, and applies them to Hyundai Sonata transactions in South Korea. The results show that these tools support managerial use by guiding incentive allocation, customer outreach timing and guarantee adjustments in response to rate and volatility shocks. Robustness checks confirm the stability of the metrics under bootstrap sampling and rolling parameter estimates, as well as the consistency of the Weibull-based sensitivities across vehicle models relative to lognormal and gamma benchmarks. Year-by-year tests spanning turbulent COVID-era conditions through the subsequent normalization period further show that the Weibull specification maintains a reliably strong fit. The study concludes that the framework provides practical value for auto finance companies and offers fertile directions for future work on time-varying models, as well as opportunities to extend the approach to industries where extreme, outlier-driven losses are central to risk management.

Keywords: Residual value risk; Weibull distribution; Option pricing; Automotive finance; Lease retention strategy (search for similar items in EconPapers)
Date: 2026
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.emerald.com/jdqs/article/34/2/128/1336 ... aging-residual-value (text/html)
https://www.emerald.com/jdqs/article-pdf/34/2/128/ ... s-09-2025-0065en.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:jdqspp:jdqs-09-2025-0065

DOI: 10.1108/JDQS-09-2025-0065

Access Statistics for this article

More articles in Journal of Derivatives and Quantitative Studies: ???????????? from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().