Modeling financial leasing by optimal stopping approach

Luigi De Cesare (), Lucianna Cananà (), Tiziana Ciano () and Massimiliano Ferrara ()
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Luigi De Cesare: University of Foggia
Lucianna Cananà: University Aldo Moro di Bari
Tiziana Ciano: University of Valle d’Aosta
Massimiliano Ferrara: University Mediterranea of Reggio Calabria

Decisions in Economics and Finance, 2024, vol. 47, issue 1, No 8, 199-213

Abstract: Abstract Leasing valuation is a topic that has aroused considerable interest in business circles. This paper examines leasing from the point of view of the lessor who can decide to leave the contract due to default. We analyze in introducing a model in which the lessor decides whether or not to terminate the contract at a given point in time, comparing it with the cost of capital of alternative investments. The proposed model is stochastic, and it is strongly based on correlated random walks, making it more adaptable to real-world circumstances. Furthermore, we propose a recombinant binomial tree based on correlated random walks, performing numerical simulations starting from CIR and Vasicek models. We will point out that as the rate of cost of capital of an alternative investment increases, the optimal boundary curve decreases, so the lessor leaves, while as the past interest rates increases, the curve rises and the lessor will have a concrete interest in maintaining the contract.

Keywords: Leasing contract; Optimal time; Optimal stopping; One-dimensional stochastic process (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10203-023-00429-7

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