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Risks 2019, 7(1), 11; https://doi.org/10.3390/risks7010011

Multivariate Risk-Neutral Pricing of Reverse Mortgages under the Bayesian Framework

1
Department of Actuarial Studies and Business Analytics, Macquarie University, Macquarie Park, NSW 2109, Australia
2
Faculty of Business Administration, Tokyo Keizai University, Tokyo 185-8502, Japan
*
Author to whom correspondence should be addressed.
Received: 16 December 2018 / Revised: 20 January 2019 / Accepted: 21 January 2019 / Published: 24 January 2019
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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. View Full-Text
Keywords: reverse mortgage; house price risk; interest rate risk; longevity risk; risk-neutralisation; principle of maximum entropy; Bayesian modelling reverse mortgage; house price risk; interest rate risk; longevity risk; risk-neutralisation; principle of maximum entropy; Bayesian modelling
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Li, J.; Kogure, A.; Liu, J. Multivariate Risk-Neutral Pricing of Reverse Mortgages under the Bayesian Framework. Risks 2019, 7, 11.

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