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A market consistent approach to the valuation of no-negative equity guarantees and equity release mortgages

Author

Listed:
  • Dean BUCKNER

    (Eumaeus Project, London, UK)

  • Kevin DOWD

    (Durham University Business School, Durham, UK)

  • Hardy HULLEY

    (University of Technology Sydney, NSW 2007, Australia)

Abstract

This paper provides a new market consistent approach to the valuation of no negative equity guarantees and equity release mortgages. The paper provides a new approach to the estimation of volatility inputs. The proposed approach to volatility produces a volatility term structure that is dependent on the age and gender of the borrower. Illustrative valuations are provided based on the Black ’76 put pricing formula and mortality projections based on the M5 Cairns–Blake–Dowd mortality model. Results show interesting ramifications for industry practice and prudential regulation.

Suggested Citation

  • Dean BUCKNER & Kevin DOWD & Hardy HULLEY, 2023. "A market consistent approach to the valuation of no-negative equity guarantees and equity release mortgages," JODE - Journal of Demographic Economics, Cambridge University Press, vol. 89(3), pages 349-372, September.
    • Handle: RePEc:ctl:louvde:v:89:y:2023:i:3:p:349-372
    DOI: 10.1017/dem.2023.6
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    More about this item

    Keywords

    Black ‘76 model; CBDmortality model; Equity release; No negative equity guarantee;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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