Why the world needs another used vehicle index

The Exponential Markets Used Vehicle Index joins a small but established group of other automotive indices — with distinct differences.

Published

Dec 07, 2023

Author

Paul Fortin

Does the world really need another way to measure the ever-changing value of used vehicles?

This is a question we asked when we first discussed launching the Exponential Markets Used Vehicle Index.

There are already a select number of established indices published by a wide range of industry players, from automotive guidebooks to auctions to the U.S Bureau of Labor Statistics. And while each vehicle index varies widely in sophistication and adoption, if you are a corporation that needs access to the information a benchmark like ours provides, you have no shortage of options.

From our earliest conversations, Exponential felt there was a deep industry need for an automotive valuation index built to specifically take advantage of the vast leaps in data and machine-learning we’ve seen in recent years — and that can also drive modern risk management methods into the automotive ecosystem.

We highlighted the technical strengths of our launch index in our first blog — and why we feel the most modern vehicle valuation methods are especially critical in an era of unprecedented advances and high potential volatility in auto.

Options are good

Exponential determined that as in countless other industries, the health of the automotive ecosystem only stands to benefit from having multiple, co-existing vehicle benchmarks serving fleets, insurance companies and others facing potential financial risk tied to vehicle values. A completely new vehicle index with a unique and specialized technical perspective represents a previously non-existent level of optionality much more than it does any kind of competition to industry incumbents.

Quality is paramount and the value of any given index is measured largely by its ingredients and the approach taken in putting them together. Indices constructed with the highest quality underlying data and algorithms will last and those of inferior quality will not be utilized by the market. And while we feel strongly that our index is of the former category, we believe just as strongly that its benefits extend throughout the industry.

Accurate benchmarking is critical for the future of auto

In its purest form, an index is simply a tool to measure the performance of a group of assets. When its inputs and methods are suboptimal, the index can meaningfully diverge from the assets being tracked.

While this inhibits the index’s ability as an effective measuring tool, the scenario becomes increasingly harmful when the index is used for hedging purposes — as is common in derivatives markets. In this case, the difference between a listed index price and its actual spot market price yields something truly dangerous: basis risk.

Basis risk can be greatly reduced by a properly administered index informed by the latest, most relevant data. Given this, a high-quality benchmarking solution like ours is able to help entities within the automotive ecosystem realize significant benefits in planning, pricing, risk management, and fleet operations — a powerful advantage in an age of increasing unpredictability in the automotive industry.

As we designed and constructed our index, we tested and refined our benchmark against ABS lease portfolio data, partner portfolio data, and other existing used vehicle benchmarks to ensure it was optimized in all areas and outperformed them from a basis risk perspective.

But the most compelling aspect of our index comes from another element of its conception: it was designed specifically to be the underlying instrument for a wide range of tradeable derivatives.

The automotive ecosystem finally has an index designed for tradability

Unlike other existing automotive indices, every aspect of our benchmark — from its design, construction, administration, and oversight — was designed with the idea it would serve as the underlying for a planned range of Exponential derivatives contracts. This way, a fleet owner or insurance company could hedge a portion of their exposure via a derivatives contract — with our index determining the settlement price of the contract.

Again, this ability alone doesn’t make our index superior, more reliable, or even inherently preferable to another but our index does unlock a better way to manage automotive asset risk.

Tradeable stock market indices have been around since 1896 with the introduction of the Dow Jones Industrial Average index. Today, there are hundreds of tradeable indices used for hedging, investing, and speculating. They track price levels for metals, agriculture, energy, stocks, bonds, interest rates, and volatility for a wide range of commodity and securities asset classes.

The Exponential Used Vehicle Index is the first tradeable index tracking used vehicle market price levels — a designation that requires equally pioneering levels of rigor in its makeup and management.

Stringent standards breed trusted results

Tradeable indices may use the same data — and even similar algorithms — as their non-tradeable counterparts. But when an index is used to determine price levels in a given industry, hedgers and traders will analyze all aspects of its construction and administration to ensure that it’s stable, secure, transparent, has the proper initial (and ongoing) oversight, and accurately reflects market price movements.

From its inception, the Exponential Used Vehicle Index was designed to serve as a tradeable instrument to hedge and trade billions of dollars of exposure to used vehicle market volatility annually.

To meet this high standard, we secured the rights to the most robust used vehicle data set in the US, covering more than 80% of all auction transactions. With this data, our team of PhD-level data scientists optimized the index by backtesting it against actual disposal data sourced from partners and publicly available lease and daily rental ABS performance data.

The Exponential Index also uses a double imputation Hedonic Fisher Index methodology that results in faster response to market movements, lower week-to-week variability (“noise”), while requiring less data to generate an accurate signal.

With this robust data and our cutting-edge data science methods, the Exponential Used Vehicle Index has a measurably higher correlation (87%) with the Fitch Ratings ABS portfolio residual value gains and losses from 2007 to present over a leading used vehicle value index, in addition to having higher correlations for all five of the captive and bank ABS portfolios where sufficient Edgar ABS lease data is publicly available.

In our next blog post, we will provide greater detail on the steps we took to ensure this index meets the high standards required of an entirely new brand of benchmark in auto — from our stringent industry accreditation plans to its approval by an independent index governing committee.

Please reach out to us if you have any questions or would like to learn more about what we consider one of the most powerful and accurate indices specifically designed and built for managing automotive asset risk.