Developing Equity Release Markets: Risk Analysis for Reverse Mortgages and Home Reversions

Alai, Daniel H., Chen, Hua, Cho, Daniel, Hanewald, Katja, Sherris, Michael (2014) Developing Equity Release Markets: Risk Analysis for Reverse Mortgages and Home Reversions. North American Actuarial Journal, 18 (1). pp. 217-241. ISSN 1092-0277. (doi:10.1080/10920277.2014.882252) (The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided)

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Official URL
http://dx.doi.org/10.1080/10920277.2014.882252

Abstract

Equity release products are sorely needed in an aging population with high levels of home ownership. There has been a growing literature analyzing risk components and capital adequacy of reverse mortgages in recent years. However, little research has been done on the risk analysis of other equity release products, such as home reversion contracts. This is partly due to the dominance of reverse mortgage products in equity release markets worldwide. In this article we compare cash flows and risk profiles from the provider's perspective for reverse mortgage and home reversion contracts. An at-home/in long-term care split termination model is employed to calculate termination rates, and a vector autoregressive (VAR) model is used to depict the joint dynamics of economic variables including interest rates, house prices, and rental yields. We derive stochastic discount factors from the no arbitrage condition and price the no negative equity guarantee in reverse mortgages and the lease for life agreement in the home reversion plan accordingly. We compare expected payoffs and assess riskiness of these two equity release products via commonly used risk measures: Value-at-Risk (VaR) and Conditional Value-at-Risk (CVaR).

Item Type: Article
DOI/Identification number: 10.1080/10920277.2014.882252
Subjects: Q Science > QA Mathematics (inc Computing science)
Divisions: Faculties > Sciences > School of Mathematics Statistics and Actuarial Science > Actuarial Science
Depositing User: Daniel Alai
Date Deposited: 07 May 2014 13:41 UTC
Last Modified: 29 May 2019 12:34 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/41005 (The current URI for this page, for reference purposes)
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