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On non-negative equity guarantee calculations with macroeconomic variables related to house prices. (English) Zbl 1484.91368

Summary: This article investigates the impact of macroeconomic fundamentals on the valuation of non-negative equity guarantee (NNEG) of equity release mortgages. The house price returns are modeled within the family of multiplicative volatility processes using a two-component GARCH-MIDAS model. The pricing framework is constructed based on a general exponential linear pricing kernel, and the risk-neutral dynamics are derived assuming an autoregressive structure for the macroeconomic variables. Our numerical results indicate that the addition of macroeconomic variables improves the predictive performance of the house price returns and have a significant effect on the NNEG valuation.

MSC:

91G05 Actuarial mathematics
62P05 Applications of statistics to actuarial sciences and financial mathematics
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