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

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  • Thomas, R. Guy

Abstract

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.

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  • Thomas, R. Guy, 2021. "Valuation of no-negative-equity guarantees with a lower reflecting barrier," Annals of Actuarial Science, Cambridge University Press, vol. 15(1), pages 115-143, March.
    • Handle: RePEc:cup:anacsi:v:15:y:2021:i:1:p:115-143_6
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    Cited by:

    1. Dean Buckner & Kevin Dowd & Hardy Hulley, 2022. "Arbitrage Problems with Reflected Geometric Brownian Motion," Papers 2201.05312, arXiv.org, revised Sep 2022.
    2. Carole Bernard & Adam Kolkiewicz & Junsen Tang, 2023. "Valuation of Reverse Mortgages with Default Risk Models," The Journal of Real Estate Finance and Economics, Springer, vol. 66(4), pages 806-839, May.
    3. R. Guy Thomas, 2023. "Long-term option pricing with a lower reflecting barrier," Papers 2302.05808, arXiv.org.

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