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Risk-neutral valuation of the non-recourse protection in reverse mortgages: A case study for Korea

Listed author(s):
  • Kim, Joseph H.T.
  • Li, Johnny S.H.
Registered author(s):

    Reverse mortgages are increasingly seen as an alternative source of retirement income among Koreans. All reverse mortgage loans in Korea are sold with a non-recourse protection, limiting the borrowers' exposure to house price appreciation risk. This paper performs risk-neutral valuation for the non-recourse protection in the Korean reverse mortgage market. Specifically, we adopt a multivariate DCC-GARCH model that incorporates different forms of correlations between the economic variables. Risk-neutralization is accomplished using the minimum relative entropy method. Our valuation results reveal several limitations of the fee structure currently used by reverse mortgage providers. Recommendations to improve the fee structure are provided.

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    File URL: http://www.sciencedirect.com/science/article/pii/S156601411630098X
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    Article provided by Elsevier in its journal Emerging Markets Review.

    Volume (Year): 30 (2017)
    Issue (Month): C ()
    Pages: 133-154

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    Handle: RePEc:eee:ememar:v:30:y:2017:i:c:p:133-154
    DOI: 10.1016/j.ememar.2016.10.002
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620356

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