A market consistent approach to the valuation of no-negative equity guarantees and equity release mortgages

Buckner, Dean; Dowd, Kevin; Hulley, Hardy

Abstract

This paper provides a new market consistent approach to the valuation of No Negative Equity Guarantees and Equity Release Mortgages. The paper provides a new approach to the estimation of the volatility inputs. The proposed approach to volatility produces a volatility term structure that is dependent on the age and gender of the borrower. Illustrative valuations are provided based on the Black ’76 put pricing formula and mortality projections based on the M5 Cairns-Blake-Dowd (CBD) mortality model. Results have interesting ramifications for industry practice and prudential regulation.

Citation

Buckner, D., Dowd, K., & Hulley, H. (2023). A market consistent approach to the valuation of no-negative equity guarantees and equity release mortgages. Journal of Demographic Economics, 89(3), 349-372. https://doi.org/10.1017/dem.2023.6

• Journal Article Type: Article
• Acceptance Date: Apr 5, 2023
• Online Publication Date: Aug 10, 2023
• Publication Date: 2023-09
• Deposit Date: Apr 11, 2023
• Publicly Available Date: Apr 11, 2023
• Journal: Journal of Demographic Economics
• Print ISSN: 2054-0892
• Electronic ISSN: 2054-0906
• Publisher: Cambridge University Press
• Peer Reviewed: Peer Reviewed
• Volume: 89
• Issue: 3
• Pages: 349-372
• DOI: https://doi.org/10.1017/dem.2023.6
• Public URL: https://durham-repository.worktribe.com/output/1176659
• Publisher URL: https://www.cambridge.org/core/journals/journal-of-demographic-economics