IDEAS home Printed from https://ideas.repec.org/a/spr/decfin/v47y2024i1d10.1007_s10203-023-00429-7.html
   My bibliography  Save this article

Modeling financial leasing by optimal stopping approach

Author

Listed:
  • 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)

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.

Suggested Citation

  • Luigi De Cesare & Lucianna Cananà & Tiziana Ciano & Massimiliano Ferrara, 2024. "Modeling financial leasing by optimal stopping approach," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 47(1), pages 199-213, June.
    • Handle: RePEc:spr:decfin:v:47:y:2024:i:1:d:10.1007_s10203-023-00429-7
    DOI: 10.1007/s10203-023-00429-7
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10203-023-00429-7
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s10203-023-00429-7?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Franks, Julian R & Hodges, Stewart D, 1978. "Valuation of Financial Lease Contracts: A Note," Journal of Finance, American Finance Association, vol. 33(2), pages 657-669, May.
    2. Raluca Antoanetta TOMESCU, 2022. "The Financial Leasing Market From The Perspective Of Current Legal Realities," Perspectives of Law and Public Administration, Societatea de Stiinte Juridice si Administrative (Society of Juridical and Administrative Sciences), vol. 11(2), pages 246-251, June.
    3. Steven R. Grenadier, 2005. "An Equilibrium Analysis of Real Estate Leases," The Journal of Business, University of Chicago Press, vol. 78(4), pages 1173-1214, July.
    4. Sharpe, Steven A. & Nguyen, Hien H., 1995. "Capital market imperfections and the incentive to lease," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 271-294.
    5. Lucianna Cananà & Luigi De Cesare & Massimiliano Ferrara, 2022. "Advances in Financial Leasing Mechanism Designs," Mathematics, MDPI, vol. 11(1), pages 1-10, December.
    6. Trigeorgis, Lenos, 1996. "Evaluating leases with complex operating options," European Journal of Operational Research, Elsevier, vol. 91(2), pages 315-329, June.
    7. Marco Realdon, 2006. "Pricing the Credit Risk of Secured Debt and Financial Leasing," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(7‐8), pages 1298-1320, September.
    8. McConnell, John J. & Schallheim, James S., 1983. "Valuation of asset leasing contracts," Journal of Financial Economics, Elsevier, vol. 12(2), pages 237-261, August.
    9. Tien Foo Sing & Wei Liang Tang, 2004. "Valuing leasing risks in commercial property with a discrete‐time binomialtree option model," Journal of Property Investment & Finance, Emerald Group Publishing Limited, vol. 22(2), pages 173-191, April.
    10. Marco Realdon, 2006. "Pricing the Credit Risk of Secured Debt and Financial Leasing," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(7-8), pages 1298-1320.
    11. Andrey S. Nechaev & Sergey V. Zakharov & Yuliya N. Barykina & Marina V. Vel'm & Olga N. Kuznetsova, 2022. "Forming methodologies to improving the efficiency of innovative companies based on leasing tools," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 12(2), pages 536-553, April.
    12. Dayanik, Savas & Karatzas, Ioannis, 2003. "On the optimal stopping problem for one-dimensional diffusions," Stochastic Processes and their Applications, Elsevier, vol. 107(2), pages 173-212, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lucianna Cananà & Luigi De Cesare & Massimiliano Ferrara, 2022. "Advances in Financial Leasing Mechanism Designs," Mathematics, MDPI, vol. 11(1), pages 1-10, December.
    2. Ons Triki & Fathi Abid, 2022. "Contingent convertible lease modeling and credit risk management," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-29, December.
    3. Emhjellen, Magne & Løvås, Kjell & Osmundsen, Petter, 2009. "LNG Project Valuation with Financial Leasing Contracts," UiS Working Papers in Economics and Finance 2009/15, University of Stavanger.
    4. Golbeck, Steven & Linetsky, Vadim, 2013. "Asset financing with credit risk," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 43-59.
    5. Ahmed Al sharif & Ruwen Qin, 2015. "Double-sided price adjustment flexibility with a preemptive right to exercise," Annals of Operations Research, Springer, vol. 226(1), pages 29-50, March.
    6. Marco Realdon, 2006. "Pricing the Credit Risk of Secured Debt and Financial Leasing," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(7‐8), pages 1298-1320, September.
    7. Jong Chool Park & Qiang Wu, 2009. "Financial Restatements, Cost of Debt and Information Spillover: Evidence From the Secondary Loan Market," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(9‐10), pages 1117-1147, November.
    8. Peter Løchte Jørgensen & Domenico De Giovanni, 2010. "Time Charters with Purchase Options in Shipping: Valuation and Risk Management," Applied Mathematical Finance, Taylor & Francis Journals, vol. 17(5), pages 399-430.
    9. Elizabeth Devos & Erik Devos & He Li & Desmond Tsang, 2022. "Operating Lease as Alternative Financing for REITs: a Viable Strategy or a Sign of Trouble?," The Journal of Real Estate Finance and Economics, Springer, vol. 65(2), pages 153-180, August.
    10. Anna Białek-Jaworska & Natalia Nehrebecka, 2016. "Determinants of Polish Enterprises' Propensity to Lease," Working Papers 2016-07, Faculty of Economic Sciences, University of Warsaw.
    11. Serafeim Tsoukas & Marina-Eliza Spaliara, 2014. "Market Implied Ratings and Financing Constraints: Evidence from US Firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(1-2), pages 242-269, January.
    12. Andrikopoulos, Athanasios & Markellos, Raphael N., 2015. "Dynamic interaction between markets for leasing and selling automobiles," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 260-270.
    13. Igal Hendel & Alessandro Lizzeri, 2002. "The Role of Leasing under Adverse Selection," Journal of Political Economy, University of Chicago Press, vol. 110(1), pages 113-143, February.
    14. Hugues Pirotte & Mathias Schmit & Céline Vaessen, 2004. "Credit risk mitigation evidence in auto leases: LGD and residual value risk," Working Papers CEB 04-008.RS, ULB -- Universite Libre de Bruxelles.
    15. Chuang-Chang Chang & Hsiao-Wei Ho & Henry Hongren Huang & Yildiray Yildirim, 2024. "A reduced-form model for lease contract valuation with embedded options," Review of Quantitative Finance and Accounting, Springer, vol. 62(2), pages 841-864, February.
    16. Miki Seko & Kazuto Sumita & Jiro Yoshida, 2012. "Downward-Sloping Term Structure of Lease Rates: A Puzzle," Keio/Kyoto Joint Global COE Discussion Paper Series 2011-042, Keio/Kyoto Joint Global COE Program.
    17. Jonathan A. Wiley, 2014. "Gross Lease Premiums," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(3), pages 606-626, September.
    18. Jong Chool Park & Qiang Wu, 2009. "Financial Restatements, Cost of Debt and Information Spillover: Evidence From the Secondary Loan Market," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(9-10), pages 1117-1147.
    19. Alain Capiez, 2000. "Evaluation du crédit-bail et risque de crédit," Post-Print halshs-00587435, HAL.
    20. Fan, Gang-Zhi & Pu, Ming & Deng, Xiaoying & Ong, Seow Eng, 2018. "Optimal portfolio choices and the determination of housing rents under housing market uncertainty," Journal of Housing Economics, Elsevier, vol. 41(C), pages 200-217.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:decfin:v:47:y:2024:i:1:d:10.1007_s10203-023-00429-7. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.