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An approximation approach for valuing reverse mortgages

Jing-Tang Tsay, Che-Chun Lin, Larry J. Prather and Richard Buttimer

Journal of Housing Economics, 2014, vol. 25, issue C, 39-52

Abstract: We derive an approximate pricing formula for use in reverse mortgage valuation that allows the house price and interest rate to be stochastic with a deterministic distribution of termination time. We compare the results from the approximate pricing formula to a simulation and find that the approximate pricing formula can significantly reduce computational intensity and provide a close approximation to simulation results. The approximation approach enables reverse mortgage holders to undertake complicated portfolio optimization and hedging analyses.

Keywords: G21; Reverse mortgage; Longevity risk; Option pricing (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1016/j.jhe.2014.03.001

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Handle: RePEc:eee:jhouse:v:25:y:2014:i:c:p:39-52