Multivariate risk-neutral pricing of reverse mortgages under the bayesian framework

Jackie Li; Atsuyuki Kogure; Jia Liu

doi:10.3390/risks7010011

Multivariate risk-neutral pricing of reverse mortgages under the bayesian framework

Jackie Li^*, Atsuyuki Kogure, Jia Liu

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

9 Citations (Scopus)

Abstract

In this paper, we suggest a Bayesian multivariate approach for pricing a reverse mortgage, allowing for house price risk, interest rate risk and longevity risk. We adopt the principle of maximum entropy in risk-neutralisation of these three risk components simultaneously. Our numerical results based on Australian data suggest that a reverse mortgage would be financially sustainable under the current financial environment and the model settings and assumptions.

Original language	English
Article number	11
Journal	Risks
Volume	7
Issue number	1
DOIs	https://doi.org/10.3390/risks7010011
Publication status	Published - Mar 2019
Externally published	Yes

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title = "Multivariate risk-neutral pricing of reverse mortgages under the bayesian framework",

abstract = "In this paper, we suggest a Bayesian multivariate approach for pricing a reverse mortgage, allowing for house price risk, interest rate risk and longevity risk. We adopt the principle of maximum entropy in risk-neutralisation of these three risk components simultaneously. Our numerical results based on Australian data suggest that a reverse mortgage would be financially sustainable under the current financial environment and the model settings and assumptions.",

keywords = "Bayesian modelling, House price risk, Interest rate risk, Longevity risk, Principle of maximum entropy, Reverse mortgage, Risk-neutralisation",

author = "Jackie Li and Atsuyuki Kogure and Jia Liu",

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AU - Kogure, Atsuyuki

AU - Liu, Jia

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N2 - In this paper, we suggest a Bayesian multivariate approach for pricing a reverse mortgage, allowing for house price risk, interest rate risk and longevity risk. We adopt the principle of maximum entropy in risk-neutralisation of these three risk components simultaneously. Our numerical results based on Australian data suggest that a reverse mortgage would be financially sustainable under the current financial environment and the model settings and assumptions.

AB - In this paper, we suggest a Bayesian multivariate approach for pricing a reverse mortgage, allowing for house price risk, interest rate risk and longevity risk. We adopt the principle of maximum entropy in risk-neutralisation of these three risk components simultaneously. Our numerical results based on Australian data suggest that a reverse mortgage would be financially sustainable under the current financial environment and the model settings and assumptions.

KW - Bayesian modelling

KW - House price risk

KW - Interest rate risk

KW - Longevity risk

KW - Principle of maximum entropy

KW - Reverse mortgage

KW - Risk-neutralisation

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Multivariate risk-neutral pricing of reverse mortgages under the bayesian framework

Abstract

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