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

Jackie Li, Atsuyuki Kogure, Jia Liu

Research output: Contribution to journalArticleResearchpeer-review

7 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 languageEnglish
Article number11
Number of pages12
JournalRisks
Volume7
Issue number1
DOIs
Publication statusPublished - 2019
Externally publishedYes

Keywords

  • Bayesian modelling
  • House price risk
  • Interest rate risk
  • Longevity risk
  • Principle of maximum entropy
  • Reverse mortgage
  • Risk-neutralisation

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