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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
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    References listed on IDEAS

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