Residual value risk in the leasing industry: A European case

Hugues Pirotte Speder and Celine Vaessen

The European Journal of Finance, 2008, vol. 14, issue 2, 157-177

Abstract: This paper is dedicated to recovery and residual value risks' modelling issues of automotive lease portfolios. First, loss-given-default distributions are estimated and compared for different samples based on risk drivers. Second, the residual value risk is approached through a resampling technique to provide one of the first empirical analysis on residual value losses in the automotive lease sector. Probability density function of losses and Value-at-risk measures are estimated on the basis of a private database comprising a unique set of 4828 individual automotive lease contracts issued between 1990 and 2001 by a major European financial institution. Then, a discussion is led in relation to the capital requirements related to residual value risk stemming from the Basel II Accord. As the greatest part of recovery risk is diversifiable, our conclusion is that a wider recognition of physical collateral in capital adequacy regulations should allow us to better reflect the relatively low-risk profile of automotive lease exposures.

Keywords: leasing; residual value risk; loss given default (LGD); Basel II Accord (search for similar items in EconPapers)
Date: 2008
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DOI: 10.1080/13518470701705637

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