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Study explores link between selling and leasing market prices for cars

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Posted February 14, 2014

Changes in the selling prices of cars can be used to improve calculations for how much people should be paying to lease a vehicle, according to a new study.

Researchers from Norwich Business School at the University of East Anglia (UEA) and Athens University of Economics and Business (AUEB) have for the first time modelled the relationship between variations in leasing and selling market prices, using almost 10 years of data from the US, the world’s largest automobile market. They suggest that in order to determine more accurately the monthly payments agreed in leasing contracts, firms need to take into account the prevailing selling, also known as cash, price of vehicles.

For households in developed countries the car is typically the second largest asset purchased after a house, and in the US a third of all cars sold are financed via leasing. The study, published this week in the Journal of Banking and Finance, finds that when selling prices go up in one month leasing rates tend to go down in the following months.

Despite its importance, the link between leasing and selling markets for vehicles is not yet fully understood and the standard way companies calculate leasing rates ignores any interactions between the two. The researchers say this could lead to customers paying significantly more or less a month, while the firms could be incurring losses rather than making a profit. To address this problem they have developed a new pricing approach for lease vehicles, which allows changes in the selling market prices to have an effect on leasing market prices and vehicle values at the end of the contract.

Read more at: Phys.org

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