The Valuation of No-Negative Equity Guarantees and Equity Release Mortgages
Dowd, K., Blake, D. 
ORCID: 0000-0002-2453-2090, Buckner, D. & Fry, J. (2019).
The Valuation of No-Negative Equity Guarantees and Equity Release Mortgages.
Economics Letters, 184,
article number 108669.
doi: 10.1016/j.econlet.2019.108669
Abstract
We outline the valuation process for a No-Negative Equity Guarantee in an Equity Release Mortgage loan and for an Equity Release Mortgage that has such a guarantee. Illustrative valuations are provided based on the Black ’76 put pricing formula and mortality projections based on the M5, M6 and M7 mortality versions of the Cairns-Blake-Dowd (CBD) family of mortality models. Results indicate that the valuations of No-Negative Equity Guarantees are high relative to loan amounts and subject to considerable model risk but that the valuations of Equity Release Mortgage loans are robust to the choice of mortality model. Results have significant ramifications for industry practice and prudential regulation.
| Publication Type: | Article |
|---|---|
| Additional Information: | © Elsevier, 2019. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/ |
| Publisher Keywords: | Actuarial Science, Black ’76 model, CBD mortality models, Equity Release, No Negative Equity Guarantee, Prudential Regulation |
| Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HF Commerce > HF5601 Accounting |
| Departments: | Bayes Business School > Finance |
| SWORD Depositor: |
Available under License Creative Commons Attribution Non-commercial No Derivatives.
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