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    The valuation of no-negative equity guarantees and equity release mortgages

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    Fry_Economics_Letters_Nov_2019.pdf (359.8Kb)
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    Publication date
    2019-11
    Author
    Dowd, K.
    Buckner, D.
    Blake, D.
    Fry, John
    Keyword
    Actuarial science
    Black '76 model
    CBD mortality models
    Equity release
    No-negative equity guarantee
    Prudential regulation
    Rights
    © 2019 Elsevier B.V. All rights reserved. Reproduced in accordance with the publisher's self-archiving policy. This manuscript version is made available under the CC-BY-NC-ND 4.0 license.
    Peer-Reviewed
    Yes
    
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    Abstract
    We outline the valuation process for a No-Negative Equity Guarantee in an Equity Release Mortgage loan and for an Equity Release Mortgage that has such a guarantee. Illustrative valuations are provided based on the Black ’76 put pricing formula and mortality projections based on the M5, M6 and M7 mortality versions of the Cairns–Blake–Dowd (CBD) family of mortality models. Results indicate that the valuations of No-Negative Equity Guarantees are high relative to loan amounts and subject to considerable model risk but that the valuations of Equity Release Mortgage loans are robust to the choice of mortality model. Results have significant ramifications for industry practice and prudential regulation.
    URI
    http://hdl.handle.net/10454/17567
    Version
    Accepted manuscript
    Citation
    Dowd K, Buckner D, Blake D et al (2019) The valuation of no-negative equity guarantees and equity release mortgages. Economics Letters. 184: 108669.
    Link to publisher’s version
    https://doi.org/10.1016/j.econlet.2019.108669
    Type
    Article
    Collections
    Management and Law Publications

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