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Valuation of no-negative-equity guarantees with a lower reflecting barrier

Thomas, R. Guy (2021) Valuation of no-negative-equity guarantees with a lower reflecting barrier. Annals of Actuarial Science, 15 (1). pp. 115-143. ISSN 1748-4995. E-ISSN 1748-5002. (doi:10.1017/S1748499520000172) (KAR id:87015)

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If the general level of house prices falls a long way, policymakers may introduce new policies which seek to support prices. This paper considers the effect of such interventions on the valuation of no-negative-equity guarantees (NNEG) in equity release mortgages. I model interventions by a reflecting barrier expressed as a fraction of the current level of house prices. Reflection at the barrier is instantaneous, so the no-arbitrage property is preserved, and hence risk-neutral valuation of NNEG is possible. The reflecting barrier can alternatively be justified as a representation of the different economic nature of the underlying housing (and particularly freehold land) assets in NNEG valuations, compared with the underlying equity assets in many other option valuations.

Item Type: Article
DOI/Identification number: 10.1017/S1748499520000172
Uncontrolled keywords: No-negative-equity guarantee; NNEG; Equity release; Lifetime mortgage; Reverse mortgage; Put option; Reflecting barrier
Subjects: H Social Sciences > HG Finance
Divisions: Divisions > Division of Computing, Engineering and Mathematical Sciences > School of Mathematics, Statistics and Actuarial Science
Depositing User: Guy Thomas
Date Deposited: 08 Mar 2021 18:42 UTC
Last Modified: 10 Dec 2022 08:16 UTC
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