Residual Value Risk Research Articles

Understanding the Impacts on Automobile Leasing Firm Loss in China: An Analysis of Vehicle Residual Value Risk and Lease Price Patterns

ABSTRACTThe paper addresses vehicle depreciation and pricing issues in the automobile leasing industry in China. Under the current industry climate, operating lease firms face large residual value risk, and therefore, how to price contracts that minimises such risk is an important question. By analysing market data of used vehicles, an exponential decay function was developed to model the price dynamics across different brands and model series. Specifically, we estimate the depreciation rate directly from the data. In addition, by considering all revenue and cost components and converting them into present value terms, appropriate deposit and rents combintions were sought under different profit expectations. Length of contracts, age of vehicles and purchase cost factors were also considered to detect any further patterns in rents. The research outcomes will provide guidance on lease pricing given the current development of the industry, thereby improving firms’ profitability position as well as helping maintain their competitiveness and growth.

Process‐Based Identification of Critical Factors for Residual Value Risk in China′s Highway PPP Projects

Although the Chinese government at all levels has increasingly embraced Public‐Private Partnership (PPP) as their preferred approach to deliver large‐scale infrastructure since 2014, residual value risk (RVR) has been ignored in PPP practice. To systematically explore the critical risk factors (CRFs) responsible for measuring RVR in highway PPP projects, this paper proposes and refines a conceptual model composed of two risk dimensions (four risk categories) and 29 indicators through process‐based viewpoint. Through literature review and expert interview, a structured questionnaire was developed to collect responses with rich working experience in construction industry or highway PPP projects. The refined measurement model with 21 CRFs was validated through mean value analysis (MVA) and confirmatory factor analysis (CFA) performed by SPSS 23.0 and AMOS 23.0, respectively. The findings indicate that 21 CRFs are significant in influencing RVR of highway PPP projects. Moreover, RVR from system dimension is mainly concentrating on institutional environment, macroeconomy, and relationship aspects, whereas financing in preconstruction, quality in construction, and market demand in operation are the most significant CRFs in nonsystem dimension. Furthermore, there is an accumulative exposure of RVR during the project process, especially in preconstruction and operation. This paper sheds light on the significance of lifecycle management on RVR and provides a practical approach for measuring RVR and implementing sustainable practice in highway or other transportation PPP projects.

Modelling residual value risk through ontology to address vulnerability of PPP project system

For facilitating the management of Residual Value Risk (RVR) in Public Private Partnership (PPP) projects, an ontology-based model is established to describe the generation process and complex relationships of RVR. An ontology-based approach is proposed to analyze the RVR in PPPs, which is a framework addressing the vulnerability and a knowledge-based modeling for RVR management. The RVR ontology model is composed of class of Project, Risk, and Vulnerability, as well as taxonomy of risk factors for risk sources (RS), risk events (RE), risk consequences (RC), exposure (V1), resilience (V2) and sensitivity (V3). Meanwhile, different relationships among taxonomies, classes and individuals are expressed in model. Moreover, the object properties for class project and the object properties of inherited/non-inherited relationships are defined. Meanwhile, project-based, risk-based, and vulnerability-based datatype property are further described. Then a real individual is established by using the ontology editing software Protégé. The proposed RVR ontology model can be used to visualize and manipulate various representations in RVR management as well as to implement the work of risk reasoning and analyzing. The proposed RVR ontology framework provides a useful framework to systematize different knowledge of RVRs in PPP projects, in which the related knowledge can be described clearly and effectively. Moreover, the proposed framework can enhance data process function and improve the analysis of RVR probability and vulnerability in PPP projects through sharedness and transferability of RVR knowledge provided by ontology-based RVR model for different stakeholders in PPP projects.

Exploring Key Indicators of Residual Value Risks in China’s Public–Private Partnership Projects

Public–private partnerships (PPPs) are gaining popularity in China because of governments’ increasing budget constraints and the urgent need to develop infrastructure since 2014. However, residual value risk (RVR) is a significant threat to the success of PPP projects and challenges the governance capability of China’s government, where key risk indicators (KRIs) can be used as a measure to reveal the potential presence, level, or trend of RVR. To help the public sector obtain estimated value as specified in a concession agreement when the projects are transferred back to the government at the end of the PPP agreement or in earlier termination due to RVR, this paper proposes and refines a KRI conceptual model composed of seven risk dimensions and 61 indicators. A structured questionnaire survey with PPP experts investigated the relative significance of those 61 KRIs for RVR management in PPPs. Although the survey results show that all KRIs are important, seven risk dimensions contribute differently to the exposure of RVR. A confirmatory factor analysis (CFA) was used to test whether the proposed conceptual model fit the observed set of collected data in a predictable way by goodness-of-fit indices, and to further consolidate the KRIs. The refined KRI model uses 41 KRIs based on survey and CFA results, indicating that residual value (RV) of a PPP project is strongly influenced by effective maintenance, long-term sustainable development, and reasonable profitability and refinanceability. The KRIs including high-quality design work in the early stages of PPP projects, construction quality and public service quality, comparatively low operation costs during the operation period, and feasible technologies adopted by private sectors have a greater value in corresponding dimensions. These 41 KRIs have the ability to indicate trends of losses of RV in PPPs, control weaknesses for RVR management in PPPs, and obtain long-term and sustainable development through PPP projects.

Rizik unovčenja objekta leasinga u ugovoru o operativnom leasingu motornog vozila

Rad se bavi istraživanjem ugovora o operativnom leasingu motornog vozila u hrvatskoj poslovnoj praksi. Analiziraju se odredbe općih uvjeta poslovanja za ugovore o operativnom leasingu hrvatskih leasing društava, posebno one koje se odnose na prava i obveze ugovornih strana poslije prestanka ugovora o operativnom leasingu i vraćanja motornog vozila davatelju leasinga. Utvrđuje se postojanje tri modela ugovora o operativnom leasingu motornog vozila u hrvatskoj poslovnoj praksi koji se razlikuju međusobno prema kriteriju prijenosa i raspodjele rizika unovčenja motornog vozila. Ti ugovorni modeli uspoređuju se s dva najčešća ugovorna modela ugovora o leasingu motornog vozila iz austrijske i njemačke poslovne prakse: ugovorom s obračunom kilometraže i ugovorom s obračunom ostatka vrijednosti. Na temelju rezultata te usporedbe, ispituje se primjenjivost pojedinih pravnih rješenja, razvijenih u austrijskoj i njemačkoj sudskoj praksi i pravnoj književnosti u vezi s ugovorom s obračunom kilometraže i ugovorom s obračunom ostatka vrijednosti, na ugovor o operativnom leasingu motornog vozila u okvirima hrvatskog prava.

Cumulative Effects on the Change of Residual Value in PPP Projects: A Comparative Case Study

Public private partnerships (PPPs) have been adopted widely to provide public facilities and services. According to the PPP agreement, PPP projects would be transferred to the public sector. However, problems related to the subsequent management of ongoing PPP projects have not been studied thoroughly. Residual value risk (RVR) can occur if the public sector cannot obtain the project in the desired conditions as required in the agreement when a project is being transferred. RVR has been identified as an important risk in PPPs and has greatly influenced the outputs of the projects. In order to further observe the change of residual value (RV) during the process of PPP projects and to reveal the internal mechanism for reducing the RVR, a comparative case study of two PPP projects in mainland China and Hong Kong was conducted. Based on the case study, different factors leading to RVR and a series of key risk indicators (KRIs) were identified. The comparison demonstrates that RVR is an important risk that could influence the success of PPP projects. The cumulative effects during the concession period can play significant roles in the occurrence of RVR. Additionally, the cumulative effects in different cases can make the RVR different because of different stakeholders’ efforts on the projects and ways to treat RVR. Finally, alternatives for the public sector to treat RVR were proposed. The findings of this research can reduce RVR and improve the performance of PPP projects.

The comparison between trade-in and leasing of a product with technology innovations

Companies can adopt trade-in and/or leasing to shorten consumers׳ upgrade cycle and gain control over secondary markets. In this paper, we consider a monopolistic manufacturer who offers a technology product to a market consisting of heterogeneous consumers. We focus on an exogenous, stochastic innovation process that determines the availability of new technology and consequently, residual value of the current product. We derive the optimal pricing strategy of trade-in and leasing, respectively, examine its impact on the manufacturer׳s expected profit, and compare the performance of the two strategies. Trade-in protects the manufacturer against residual value risk and allows the flexibility of offering the option at different innovation states separately. Leasing, on the other hand, provides the manufacturer an opportunity to circumvent low new product prices and thus increases expected profit when product reuse profitability is high. The interplay between the two forces, product reuse profitability and new product price, determines the preference between trade-in and leasing. Our findings provide monopolistic manufacturers guidance on how to optimally employ the trade-in and leasing strategies.

Methodology to Develop the Early Warning System for Residual Value Risk of Public Private Partnership Projects

The Early Warning System (EWS) was developed in this research aiming to forecast and monitor the Residual Value Risk (RVR) in PPP projects. RVR is a structured risk system which would happen at any time in the whole life before transfer of PPP projects, but consequently causes the Residual Value (RV) that the Government takes over cannot fulfill the specifications. To establish the EWS of RVR, the factor system was identified through questionnaire survey and evaluated based on statistical analysis. Besides the RVR could be learned by CBR, so a great amount of history PPP projects which have been already transferred should be structured into a case base. Furthermore, the conception of System vulnerability was applied to open up the link between the RVR and the RV, and the proper method was selected to determine the early-warning threshold. The main function of the EWS is monitoring the RVR of current PPP projects and warning the potential RV threat or opportunity.

Analysis of the Formation Path of the Residual Value Risk in Public Private Partnership Projects Based on SEM Method

Over the last 15 years, public-private partnership (PPP) has been acknowledged by many countries as an innovative approach to the procurement of public projects. In the long term of concession periods, Residual Value Risk (RVR) is a structured risk system which would happen at any time in the whole life before transfer of PPP/PFI projects, but consequently causes the Residual Value (RV) that the Government takes over cannot fulfill the specifications. So the RVR factor system was identified through the literature review and a worldwide structured questionnaire survey was conducted to analyze the significance of the identified risk factors of RVR. Furthermore, the formation path of RVR was verified based on Structural Equation Modeling (SEM). Through the proposed formation path of RVR, both the public sector and private sector can monitor the risks to help improve the implementation of PPP projects and achieve PPP project success.

Perception of Residual Value Risk in Public Private Partnership Projects: Critical Review

AbstractGiven the increased demand for public facilities and the lack of funds and skills to maintain, repair, and replenish the existing facilities, public private partnerships (PPPs) have been widely adopted and have significantly contributed to the development of new infrastructure built throughout the world. However, because many PPP projects will be transferred back to the host governments upon expiry of the concession period, problems related to the subsequent management of PPP projects have not yet been thoroughly studied. Residual value risk (RVR) is a critical concern when the projects revert back to the public sector. Through an extensive literature review and an open-ended questionnaire survey, the perception of RVR in PPP projects is elaborated in this paper, which aims to present a precise definition and meaning of RVR in PPP projects. The survey results indicate that RVR is viewed as an important concern by professionals and academics. The definition of RVR can be phrased as the risk that on...

An empirical approach to residual value risk estimation in automotive leases

PurposeThe purpose of this paper is to examine residual value risk modelling issues with a focus on automotive lease portfolios. Residual value risk is approached through a re‐sampling technique that provides the probability density function of losses and VaR measures for credit portfolios.Design/methodology/approachThe methodology is applied to a portfolio of 37,523 operating leases issued between 1989 and 2001 by a major European financial institution.FindingsThe results show that residual value losses are low and sometimes non‐existent. Moreover, the major part of residual value risk is idiosyncratic and can thus be eliminated through adequate diversification. Additionally, this internal model seems to prove that capital requirements stemming from the Basel Committee's proposed new framework are somehow overestimated.Originality/valueThis paper advocates determining a more accurate risk weight for residual value risk in order to better reflect this relatively low‐risk part of leasing activities.

Residual Value Risk and Insurance: Evidence from the Consumer Automobile Industry

Residual Value Risk and Insurance: Evidence from the Consumer Automobile Industry

Residual value risk in the leasing industry: A European case

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.

Credit Risk Mitigation Evidence in Auto Leases: LGD and Residual Value Risk

This paper is devoted to recovery and residual value risks modeling issues of automotive lease portfolios. First, loss given default distributions are estimated and compared for different samples based on risk drivers. Secondly, residual value risk is approached through a re-sampling technique to provide the first empirical residual value losses in the automotive lease sector. Probability density function of losses and VaR measures are estimated on the basis of a private database comprising a unique set of 4,828 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 Committee’s proposed new framework (as in CP3). As the greatest part of recovery risk is diversifiable, our conclusion is that a wider recognition of physical collateral under Basel II should allow to better reflecting the relatively low-risk profile of automotive lease exposures.

Residual Risk and the Valuation of Leases Under Uncertainty and Limited Information

For a variety of tax, accounting, and economic reasons, leasing has become an enormously popular method of financing the acquisition of capital assets. The explosion in lease finance, however, has left many lessors exposed to substantial risks in the form of uncertainty over the residual values of the leased assets. Residual value risk has already led to substantial losses for a number of institutions in such well-established asset markets as automobiles. The extension of lease financing to more exotic assets thus presents a substantial challenge to the leasing industry9s ability to identify and manage residual risks. This article presents a simulation framework for valuation of residual risks that is consistent with contemporary appraisal practice, but also explicitly recognizes the impact of uncertainty on residual values.

Avian Nest Defence: Theoretical Models and Evidence

Functional explanations for variations in levels of avian nest defence have been often based upon assumptions concerning optimal allocation of reproductive effort. Such a theoretical framework has led to the formulation of mathematical models aimed at predicting patterns of nest defence in the field. Here, a model is proposed that, starting from a general theoretical standpoint about optimal parental care, integrates previous models and generates new predictions concerning variables not previously included, namely predatory risk for both parents and offspring and age-dependent defensive tactics of nestlings. Optimal levels of parental defence are then expected to increase with (1) parent-offspring relatedness, (2) brood size, (3) offspring quality, (4) potential risk for the offspring, (5) offspring age, and (6) enhancement of offspring's self-defensive tactics while (7) parental residual reproductive value and (8) potential risk for parents are expected to exert a negative effect upon optimal levels of defence. Empirical data are reviewed for testing the model's predictions. Available data provide strong support for predictions concerning parameters 4, 5, 6, and 8. Failed tests concerning parameters 2 and 3 are shown to be flawed in the sense that we should expect defence levels to reflect intra-, instead of inter-individual variations in size and quality of the brood. A more detailed analysis is made concerning variations in residual reproductive value-correlated traits, such as brood number or time in the breeding season. It is argued that, when dealing with such traits, severe violations of basic assumptions (i.e. coeteris paribus statements or absence of an actual correlation between such traits and residual reproductive value) can occur, leading to unexpected results. It is concluded that life-history theory can account for most of the variability observed in nest defence patterns.

Valuation of asset leasing contracts

Abstract This paper describes the relation among a variety of asset leasing contracts, including: (1) cancellable operating leases; (2) leases which grant the lesse an option to extend the life of the lease; (3) leases that grant the lessee an option to purchase the leased asset at a fixed price at the maturity date of the lease; (4) leases that grant the lessee the right to purchase the leased asset at its ‘fair market value’ at the maturity date of the lease; (5) leases that grant an option to the lessee to purchase the leased asset at a prespecified price anytime during the life of the lease; (6) leases that require the lessee to purchase the leased asset at a fixed price at the maturity date of the lease; and (7) leases that contain non-cancellation provisions. The paper uses a compound option pricing framework to develop a general model for valuing (or evaluating) each of the types of leasing contracts. Numerical examples are presented to illustrate the effect of the various elements of a leasing contract — including cancellation risk and residual value risk — on equilibrium rental payments.