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

Joseph H.T. Kim, Johnny S.H. Li

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)133-154
Number of pages22
JournalEmerging Markets Review
Volume30
DOIs
Publication statusPublished - 2017 Mar 1

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Korea
Fees
Risk-neutral valuation
Mortgages
Economic variables
Mortgage market
Retirement income
House prices
Relative entropy
Mortgage loan
Multivariate GARCH models

All Science Journal Classification (ASJC) codes

  • Business and International Management
  • Economics and Econometrics

Cite this

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Risk-neutral valuation of the non-recourse protection in reverse mortgages : A case study for Korea. / Kim, Joseph H.T.; Li, Johnny S.H.

In: Emerging Markets Review, Vol. 30, 01.03.2017, p. 133-154.

Research output: Contribution to journalArticle

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