On non-negative equity guarantee calculations with macroeconomic variables related to house prices

Alexandru Badescu, Enoch Quaye and Radu Tunaru

Insurance: Mathematics and Economics, 2022, vol. 103, issue C, 119-138

Abstract: This article investigates the impact of macroeconomic fundamentals on the valuation of non-negative equity guarantee (NNEG) of equity release mortgages. The house price returns are modeled within the family of multiplicative volatility processes using a two-component GARCH-MIDAS model. The pricing framework is constructed based on a general exponential linear pricing kernel, and the risk-neutral dynamics are derived assuming an autoregressive structure for the macroeconomic variables. Our numerical results indicate that the addition of macroeconomic variables improves the predictive performance of the house price returns and have a significant effect on the NNEG valuation.

Keywords: House price risk; Non-negative equity guarantee; GARCH-MIDAS; Exponential linear pricing kernel; Equity release mortgages; Derivatives pricing (search for similar items in EconPapers)
JEL-codes: C58 G21 G52 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:103:y:2022:i:c:p:119-138

DOI: 10.1016/j.insmatheco.2022.01.001

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