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On non-negative equity guarantee calculations with macroeconomic variables related to house prices

Author

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  • Badescu, Alexandru
  • Quaye, Enoch
  • Tunaru, Radu
Abstract
This article investigates the impact of macroeconomic fundamentals on the valuation of non-negative equity guarantee (NNEG) of equity release mortgages. The house price returns are modeled within the family of multiplicative volatility processes using a two-component GARCH-MIDAS model. The pricing framework is constructed based on a general exponential linear pricing kernel, and the risk-neutral dynamics are derived assuming an autoregressive structure for the macroeconomic variables. Our numerical results indicate that the addition of macroeconomic variables improves the predictive performance of the house price returns and have a significant effect on the NNEG valuation.

Suggested Citation

  • Badescu, Alexandru & Quaye, Enoch & Tunaru, Radu, 2022. "On non-negative equity guarantee calculations with macroeconomic variables related to house prices," Insurance: Mathematics and Economics, Elsevier, vol. 103(C), pages 119-138.
    • Handle: RePEc:eee:insuma:v:103:y:2022:i:c:p:119-138
    DOI: 10.1016/j.insmatheco.2022.01.001
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    Cited by:

    1. de la Fuente, Iván & Navarro, Eliseo & Serna, Gregorio, 2023. "Proposal for calculating regulatory capital requirements for reverse mortgages," Socio-Economic Planning Sciences, Elsevier, vol. 88(C).
    2. E. Lorenzo & G. Piscopo & M. Sibillo, 2024. "Addressing the economic and demographic complexity via a neural network approach: risk measures for reverse mortgages," Computational Management Science, Springer, vol. 21(1), pages 1-22, June.
    3. Hong-Ming Chen & Jing-Yi Chen, 2024. "Structural analysis of reverse mortgages in Taiwan," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-11, December.

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    More about this item

    Keywords

    House price risk; Non-negative equity guarantee; GARCH-MIDAS; Exponential linear pricing kernel; Equity release mortgages; Derivatives pricing;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G52 - Financial Economics - - Household Finance - - - Insurance

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