Abstract
In this paper, we estimate the value of the no-negative-equity guarantee (NNEG) embedded in reverse mortgage contracts and develop a method for calculating regulatory capital requirements according to Basel II and III. We employ a Monte Carlo simulation method that assumes an ARMA-EGARCH process for house prices in four European countries: France, Germany, Spain and the United Kingdom. The results show different estimated values for the NNEG among countries. Specifically, the value of the NNEG tends to be related to the level of the interest rates, the rental yield and house price volatility in each country, as well as the age of the borrower. Different values for value-at-risk and the expected shortfall among countries are also found, which depend on the volatility of each country’s house price series.
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