The European used-car market at a glance: Hedonic resale price valuation in automotive leasing industry

In the leasing industry, the risk of loss on sales at the end of the contract term, as well as pricing are critically impacted by the forecasted resale price of the asset (residual value). We apply the Hedonic methodology to European auto lease portfolios, in order to estimate the resale price distribution. The Hedonic approach estimates the price of a good through the valuation of its attributes. Following a discussion on Hedonic prices, we propose an operational model for the automobile resale market. The model is applied to four European countries (France, Germany, Spain and Great Britain), and distributions are calculated on two vehicle versions (Audi A4 & Ford Focus) allowing a comparison of market depreciation patterns and residual value risks.