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 journalArticlepeer-review

7 Citations (Scopus)


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
Publication statusPublished - 2017 Mar 1

Bibliographical note

Funding Information:
J.H.T. Kim is grateful for the support of the National Research Foundation of Korea (NRF-2015R1A1A1A05027336). J.S.-H. Li acknowledges financial support from the Global Risk Institute, the Natural Sciences and Engineering Research Council of Canada (Discovery Grant RGPIN-356050-2013) and the Society of Actuaries Center of Actuarial Excellence Program.

Publisher Copyright:
© 2016 Elsevier B.V.

All Science Journal Classification (ASJC) codes

  • Business and International Management
  • Economics and Econometrics


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