On Pricing and Hedging the No-Negative-Equity Guarantee in Equity Release Mechanisms

Li, Johnny Siu-Hang; Hardy, Mary R.; Tan, Ken Seng

doi:10.1111/j.1539-6975.2009.01344.x

Cited by 20 publications

(9 citation statements)

References 25 publications

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“…A notable publication from this collaboration was Li et al (2009), which extends the Lee-Carter model to allow for heterogeneity within each age/year cell, hence providing more realistic confidence bounds for longevity projection. Another is Li et al (2010), which combines financial pricing and longevity models in an early analysis of the financial economics of reverse mortgage contracts.…”

Section: Longevitymentioning

confidence: 99%

Keng Seng Tan 1970–2023 In Memoriam

Hardy

Boyle

2023

Ann. actuar. sci.

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The editorial is dedicated to the memory of Ken Seng Tan, who passed away on January 1, 2023, at the height of his academic career. He was one of the most influential and prolific actuarial researchers of the last three decades.Ken Seng Tan moved to Canada from Malaysia for his undergraduate studies and remained there until 2019. In 1998, he completed his PhD in Actuarial Science at the University of Waterloo, where his doctoral thesis, Quasi-Monte Carlo Methods: Applications in Finance and Actuarial Science, won a university award for Outstanding Achievement In Graduate Studies.

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Section: Longevitymentioning

confidence: 99%

Keng Seng Tan 1970–2023 In Memoriam

Hardy

Boyle

2023

Ann. actuar. sci.

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“…Hence, someone who expects house prices to decline, or appreciate more slowly, should perceive a higher value from a reverse mortgage over a HELOC. With growing degree of sophistication in the modeling of risks, there is a substantial literature which evaluate the non-negative equity guarantee for various reverse mortgage products (Li et al, 2010;Cho et al, 2015;Alai et al, 2014;Shao et al, 2015). Davidoff (2015) estimates that the value of the NNEG embodied in products offered in the U.S. can be large, in particular when idiosyncratic house price risk is taken into account.…”

Section: The Value Of Reverse Mortgagesmentioning

confidence: 99%

Reverse Mortgages and Financial Literacy

Choinière-Crèvecoeur¹,

Michaud²

2023

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Few retirees use reverse mortgages. In this paper, we investigate how financial literacy and prior knowledge of the product influence take-up by conducting a stated-preference experiment. We exogenously manipulate characteristics of reverse mortgages to tease out how consumers value them and investigate differences by financial literacy and prior knowledge of reverse mortgages. We find that those with higher financial knowledge are more likely to know about reverse mortgages, not more likely to purchase them at any cost but are more sensitive to the interest rate and the insurance value of these products in terms of the non-negative equity guarantee.

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“…Hence, we applied the conditional Esscher transform approach to determine the risk‐neutral pricing. The use of the Esscher transform to option pricing was proposed in Gerber and Shiu 15 and that the use of the conditional Esscher transform approach to price options in a GARCH model was proposed in Siu et al 10 …”

Section: Model Description and Risk‐neutral Measurementioning

confidence: 99%

“…Many standard criteria are used to select the appropriate model for the data. A risk‐neutral measure is obtained by following Siu‐Hang Li et al, 10 and Ng et al 11 for the proposed risky asset model. Moreover, we have considered the dynamic withdrawal strategy and surrender benefit.…”

Section: Introductionmentioning

confidence: 99%

Time series model for GLWB with surrender benefit and stochastic interest rate: Dynamic withdrawal approach

Singh

Arunachalam

Selvamuthu

2023

Appl Stoch Models Bus & Ind

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This study investigates the pricing problem of a variable annuity (VA) contract embedded with a guaranteed lifetime withdrawal benefit (GLWB) rider. VAs are annuities in which the value is linked to a bond and equity sub‐account fund. The guaranteed lifetime withdrawal benefit rider regularly provides a series of payments to the policyholder for the term of the policy while he/she is alive, regardless of portfolio performance. At the time of the policyholder's death, the remaining fund value is given to his nominee. Therefore, proper fund modeling is critical in the pricing of VA products. Several writers in the literature used a GBM model in which variance is considered to be constant to represent the fund value in a variable annuity contract. However, on the other hand, the returns on financial assets are non‐normally distributed in real life. A bit much Kurtosis, leverage effect, and Non‐zero Skewness characterize the returns. The generalized autoregressive conditional heteroscedastic (GARCH) models are also used for presenting a discrete framework for the pricing of GLWB. Still, the interest rate was kept constant without including the surrender benefit and the static withdrawal approach, which keeps the model far from the real scenario. Thus, in this research, the generalized GARCH models are used with surrender benefit and dynamic withdrawal strategy to develop a time series model for the pricing of annuity that overcomes the constraints of previous models. A numerical illustration and sensitivity analysis are used to examine the suggested model.

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On Pricing and Hedging the No-Negative-Equity Guarantee in Equity Release Mechanisms

Cited by 20 publications

References 25 publications

Keng Seng Tan 1970–2023 In Memoriam

Keng Seng Tan 1970–2023 In Memoriam

Reverse Mortgages and Financial Literacy

Time series model for GLWB with surrender benefit and stochastic interest rate: Dynamic withdrawal approach

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