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1 results

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

  • R. Guy Thomas
  • Journal:
    Annals of Actuarial Science / Volume 15 / Issue 1 / March 2021
    Published online by Cambridge University Press:
    10 July 2020, pp. 115-143
    • Article
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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.