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

Dean Buckner, Kevin Dowd and Hardy Hulley
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Dean Buckner: Eumaeus Project, London, UK
Kevin Dowd: Durham University Business School, Durham, UK
Hardy Hulley: University of Technology Sydney, NSW 2007, Australia

JODE - Journal of Demographic Economics, 2023, vol. 89, issue 3, 349-372

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 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 mortality model. Results show interesting ramifications for industry practice and prudential regulation.

Keywords: Black ‘76 model; CBDmortality model; Equity release; No negative equity guarantee (search for similar items in EconPapers)
JEL-codes: G2 G3 (search for similar items in EconPapers)
Date: 2023-09-01
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Persistent link: https://EconPapers.repec.org/RePEc:ctl:louvde:v:89:y:2023:i:3:p:349-372

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