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On the valuation of reverse mortgages with regular tenure payments

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  • Lee, Yung-Tsung
  • Wang, Chou-Wen
  • Huang, Hong-Chih
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    Abstract

    For the valuation of reverse mortgages with tenure payments, this article proposes a specific analytic valuation framework with mortality risk, interest rate risk, and housing price risk that helps determine fair premiums when the present value of premiums equals the present value of contingent losses. The analytic valuation of reverse mortgages with tenure payments is more complex than the valuation with a lump sum payment. This study therefore proposes a dimension reduction technique to achieve a closed-form solution for reverse annuity mortgage insurance, conditional on the evolution of interest rates. The technique provides strong accuracy, offering important implications for lenders and insurers.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0167668712000753
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    Bibliographic Info

    Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

    Volume (Year): 51 (2012)
    Issue (Month): 2 ()
    Pages: 430-441

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    Handle: RePEc:eee:insuma:v:51:y:2012:i:2:p:430-441

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    Web page: http://www.elsevier.com/locate/inca/505554

    Related research

    Keywords: Reverse mortgages; Annuity payments; Option pricing; Dimension reduction;

    References

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    Cited by:
    1. Yang, Sharon S. & Wang, Chou-Wen, 2013. "Pricing and securitization of multi-country longevity risk with mortality dependence," Insurance: Mathematics and Economics, Elsevier, vol. 52(2), pages 157-169.

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