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A Study on the Main Determination of Mortgage Risk: Evidence from Reverse Mortgage Markets

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  • Chien-Chiang Lee
  • Kuo-Shing Chen
  • David So-De Shyu

Abstract

The main determination of mortgage risk factors is undoubtedly related to the housing price. In this article, we employ threshold GARCH process in practical analysis, to capture the house price dynamic on the logarithm return. This study also estimates the housing price volatility in the presence of stationary variance property from the threshold GARCH model and its implied volatility can serve as a benchmark for the pricing reverse mortgage derivatives. Our results have important implications for hedging risk of reverse mortgages. To our best knowledge, this paper is the first study employing Poisson Regression approach to look at the housing prices risk of reverse mortgage incorporated with its number of loans.

Suggested Citation

  • Chien-Chiang Lee & Kuo-Shing Chen & David So-De Shyu, 2015. "A Study on the Main Determination of Mortgage Risk: Evidence from Reverse Mortgage Markets," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 6(2), pages 84-94, April.
    • Handle: RePEc:jfr:ijfr11:v:6:y:2015:i:2:p:84-94
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    References listed on IDEAS

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    1. Johnny Siu‐Hang Li & Mary R. Hardy & Ken Seng Tan, 2010. "On Pricing and Hedging the No‐Negative‐Equity Guarantee in Equity Release Mechanisms," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(2), pages 499-522, June.
    2. Daniel Alai & Hua Chen & Daniel Cho & Katja Hanewald & Michael Sherris, 2014. "Developing Equity Release Markets: Risk Analysis for Reverse Mortgages and Home Reversions," North American Actuarial Journal, Taylor & Francis Journals, vol. 18(1), pages 217-241.
    3. Zakoian, Jean-Michel, 1994. "Threshold heteroskedastic models," Journal of Economic Dynamics and Control, Elsevier, vol. 18(5), pages 931-955, September.
    4. Gordon W. Crawford & Michael C. Fratantoni, 2003. "Assessing the Forecasting Performance of Regime‐Switching, ARIMA and GARCH Models of House Prices," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 31(2), pages 223-243, June.
    5. Awartani, Basel M.A. & Corradi, Valentina, 2005. "Predicting the volatility of the S&P-500 stock index via GARCH models: the role of asymmetries," International Journal of Forecasting, Elsevier, vol. 21(1), pages 167-183.
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    Cited by:

    1. Kuo‐Shing Chen & J. Jimmy Yang, 2020. "Housing Price Dynamics, Mortgage Credit and Reverse Mortgage Demand: Theory and Empirical Evidence," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 48(2), pages 599-632, June.

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