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

Badescu, Alexandru, Quaye, Enoch and Tunaru, Radu (2022) On non-negative equity guarantee calculations with macroeconomic variables related to house prices. Insurance: Mathematics and Economics, 103. pp. 119-138. ISSN 0167-6687

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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.

Item Type: Article
Schools and Departments: University of Sussex Business School > Accounting and Finance
SWORD Depositor: Mx Elements Account
Depositing User: Mx Elements Account
Date Deposited: 18 Feb 2022 09:53
Last Modified: 18 Feb 2022 12:30
URI: http://sro.sussex.ac.uk/id/eprint/104428

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