Estimating Successful Bid Price of Singapore Certificate of Entitlement. See attached file for full problem description.
Please see the attached file.
This is a real example done but with a sample sample size to make things easy and manageable. The real life model would have a large number of data points.
Estimating Successful Bid Price of Singapore Certificate of Entitlement
Singapore has a unique system of ownership of expensive private cars. Under this system any person who wishes to purchase a car from a car dealer has to bid for a Certificate Of Entitlement (COE). Estimating the likely cut-off price for the bids is a big challenge for the car buyers. The, the objective of this exercise is to develop a model to estimate the successful bid price of Singapore COE. To achieve this, likely variables influencing the COE prices are identified and linear regression model is developed between the dependent and independent variables. The data is collected from different sources to test the model. Scatter plot, correlation analysis and stepwise regression is done to analyze the data and to test whether the regression model is a good estimation model. The results of the data analysis indicate that COE prices are influenced by the exchange rate and previous COE prices with a lag of 2 months. Contrary to initial impression stock market data does not influence the COE prices. The linear regression model explains 52% variance, which indicates a good practical use for the model.
Singapore has a unique system of ownership of expensive private cars. Under this system any person who wishes to purchase a car from a car dealer has to bid for a Certificate Of Entitlement (COE). The Land Transport Authority organizes this tender exercise. Every month a limited quota of cars are placed for tendering and people willing to purchase these cars bid for them. The successful bid is decided by the cut off number of quota assigned for that particular month. As the bidding process is sealed bidding, the car purchaser is in dilemma about how much to bid for the COE. He may not like to bid high. As, in case the number of bidders is less than the number of quota cars, there will be no quota premium and by bidding high he will be paying a higher price than he would have been if he would have known about the numbers of bidders. Similarly, he may not like to bid low also as in case when number of bidders are more than the quota, he may not win the COE.
This situation provides an excellent case where we could apply statistical analytical tools to estimate the successful COE price. This estimated COE price would help the car purchaser to rightly place their bid. Thus, the objective of this exercise is to develop a model to estimate the successful bid price of Singapore COE.
2. Model Development
To develop the model for estimation of successful bid price for COE, we need to look at the possible factors, which may affect the COE prices. Drawing our knowledge from the microeconomics, we know that price in any market mechanism is decided by the interaction between demand and supply. Thus, the COE price will also be determined by the demand and supply factors for the COE. On having a further look into the demand factors, based on our microeconomics knowledge, the COE demand will be affected by following factors:
• Future economic outlook
• Current economic conditions
• Historical price of COE
• Stock market performance
• Exchange rate and
• Affordability etc
Of the above factors, the stock market performance, exchange rate and historic price of COE seems to be the three most important factors to determine the COE price. The reason why it is felt that these are key factors in the final outcome are given below:
a. Investors get benefited when the stock market performs well. Hence they have surplus money to buy luxury goods like expensive automobiles, golf memberships and property. Spending more money is not a concern for them to secure a COE and buy a car. This result in rise in the price of COE when the stock market performs well.
b. Singapore doesn't manufacture cars. All cars sold in Singapore are imported. The ultimate price of the imported good depends on the relative strength between the currencies of the exporter and importer countries. Since more than 75% of private cars sold in Singapore are Japanese makes like Toyota, Honda, Nissan and Mitsubishi, hence the exchange rate between the Singapore Dollar and Japanese Yen does affect the final COE price.
c. The historic prices are important as the car buyer will look at the previous months COE price and based on that they are likely to decide whether they are going to bid COE for this month or not. If the previous months COE price was very high, less people are likely too bid for this month and vice versa.
While building a model for the successful bid price of COE, it is to be kept in mind that COE price will be the lag variable and factors affecting COE price will be lead variables i.e. the COE price of this month will be affected by the stock market, exchange rate and COE price for the previous month. Since, the task is to estimate the COE price for this month and the data related to stock market, exchange rate etc. for this month is yet not known, the ...
Singapore Certificate of Entitlement is modeled.