With leasing activity continuing to intensify, a quartet of experts from Moody’s Analytics devised elaborate formulas and explanations for how to structure residual values that might help captive finance companies, other institutions that provide vehicle leasing as well as other service providers involved with remarketing.
The Moody’s team introduce a new model for forecasting the residual values of vehicles at the 11-digit VIN level under a variety of macroeconomic scenarios.
“We illustrate the plausibility of model forecasts under varying degrees of vehicle usage over multiple time horizons as well as with respect to different macroeconomic scenarios and car features,” the group said in a white paper titled, “Introducing AutoCycle: Residual Risk Management and Lease Pricing at the VIN Level.”
The analysts explained that they discussed and illustrated two additional features, including:
— The ability to calculate exact vehicle values at a given quantile of inferred vehicle quality (for example, the value of a 2013 Honda Accord at the 80th percentile of quality sold in March 2016, conditional on macroeconomic drivers and the car’s observed features)
— The ability to generate forecasts of residual values for vehicle in model years that have not yet come on the market (for example, the residual value of a 2019 Honda Accord sold in July 2022)
“Our model can be used for residual risk management in large lease and auto portfolios as well as for pricing leases on individual vehicles themselves,” said the Moody’s team, which included:
— Tony Hughes, managing director of research
— Samuel Malone, a director in the specialized modeling group
— Michael Brisson, an economist at Moody’s Analytics
— Michael Vogan, an economist in the credit analytics department at Moody’s Analytics
The complete white paper can be downloaded here.