Securitisation and Tranching Longevity and House Price Risk for Reverse Mortgage Products

Sharon S Yang
Additional contact information
Sharon S Yang: Department of Finance, National Central University, Taoyuan 116, Taiwan

The Geneva Papers on Risk and Insurance - Issues and Practice, 2011, vol. 36, issue 4, 648-674

Abstract: Reverse mortgage (RM) products are growing increasingly popular in many developed countries. This article designs a tranching security to deal with longevity and house price risks for RM products. The securitisation structure for RM products, the collateralised reverse mortgage obligation (CRMO), is similar to that for the collateralised debt obligation (CDO). However, unlike the CDO, the CRMO takes into account the dynamics of future mortality rates and house price returns instead of the default rate. To capture longevity risk for RM borrowers, this study employs the CBD model to project future mortality rates, as well as compares these results with those from the Lee-Carter model and static mortality table. The house price return dynamics is modelled using an ARMA-GARCH process. The calculation of fair spreads of CRMO in different tranches is illustrated under the risk-neutral valuation framework. On the basis of mortality experience and the programme of Home Equity Conversion Mortgage in the United States, this research demonstrates the problems of using static mortality tables and models risk for pricing fair spreads for CRMO numerically.

Date: 2011
References: Add references at CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
http://www.palgrave-journals.com/gpp/journal/v36/n4/pdf/gpp201126a.pdf Link to full text PDF (application/pdf)
http://www.palgrave-journals.com/gpp/journal/v36/n4/full/gpp201126a.html Link to full text HTML (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:gpprii:v:36:y:2011:i:4:p:648-674

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/41288/PS2

Access Statistics for this article

The Geneva Papers on Risk and Insurance - Issues and Practice is currently edited by Christophe Courbage

More articles in The Geneva Papers on Risk and Insurance - Issues and Practice from Palgrave Macmillan, The Geneva Association Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().