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


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


In a roll-up mortgage, the borrower receives a loan in the form of a lump sum. The loan is rolled up with interest until the borrower dies, sells the house, or moves into long-term care permanently. The house is sold at that time, and the proceeds are used to repay the loan and interest. Most roll-up mortgages are sold with a no-negative-equity guarantee (NNEG), which caps the redemption amount at the lesser of the face amount of the loan and the sale proceeds. The core of this study is to develop a framework for pricing and managing the risks of the NNEG. Copyright (c) The Journal of Risk and Insurance, 2009.

Suggested Citation

  • Johnny Siu-Hang Li & Mary R. Hardy & Ken Seng Tan, 2010. "On Pricing and Hedging the No-Negative-Equity Guarantee in Equity Release Mechanisms," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(2), pages 499-522.
  • Handle: RePEc:bla:jrinsu:v:77:y:2010:i:2:p:499-522

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    References listed on IDEAS

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    Cited by:

    1. Chen, Hua & MacMinn, Richard & Sun, Tao, 2015. "Multi-population mortality models: A factor copula approach," Insurance: Mathematics and Economics, Elsevier, vol. 63(C), pages 135-146.
    2. Kim, Joseph H.T. & Li, Johnny S.H., 2017. "Risk-neutral valuation of the non-recourse protection in reverse mortgages: A case study for Korea," Emerging Markets Review, Elsevier, vol. 30(C), pages 133-154.
    3. Shao, Adam W. & Hanewald, Katja & Sherris, Michael, 2015. "Reverse mortgage pricing and risk analysis allowing for idiosyncratic house price risk and longevity risk," Insurance: Mathematics and Economics, Elsevier, vol. 63(C), pages 76-90.
    4. 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.
    5. repec:bla:jrinsu:v:84:y:2017:i:s1:p:393-415 is not listed on IDEAS
    6. Lee, Yung-Tsung & Wang, Chou-Wen & Huang, Hong-Chih, 2012. "On the valuation of reverse mortgages with regular tenure payments," Insurance: Mathematics and Economics, Elsevier, vol. 51(2), pages 430-441.
    7. Katja Hanewald & Michael Sherris, 2013. "Postcode-Level House Price Models for Banking and Insurance Applications," The Economic Record, The Economic Society of Australia, vol. 89(286), pages 411-425, September.
    8. Chien-Chiang Lee & Kuo-Shing Chen & David So-De Shyu, 2015. "A Study on the Main Determination of Mortgage Risk: Evidence from Reverse Mortgage Markets," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 6(2), pages 84-94, April.
    9. Li, Johnny Siu-Hang & Ng, Andrew C.Y. & Chan, Wai-Sum, 2015. "Managing financial risk in Chinese stock markets: Option pricing and modeling under a multivariate threshold autoregression," International Review of Economics & Finance, Elsevier, vol. 40(C), pages 217-230.
    10. Kim Changki & Kim Eyunghee & Jung Seungyoung, 2014. "Farmland-based Reverse Mortgages for Aged Farmers," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 8(2), pages 1-29, July.

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