IDEAS home Printed from https://ideas.repec.org/a/taf/uaajxx/v5y2001i2p41-53.html
   My bibliography  Save this article

A Regime-Switching Model of Long-Term Stock Returns

Author

Listed:
  • Mary Hardy

Abstract

In this paper I first define the regime-switching lognormal model. Monthly data from the Standard and Poor’s 500 and the Toronto Stock Exchange 300 indices are used to fit the model parameters, using maximum likelihood estimation. The fit of the regime-switching model to the data is compared with other common econometric models, including the generalized autoregressive conditionally heteroskedastic model. The distribution function of the regime-switching model is derived. Prices of European options using the regime-switching model are derived and implied volatilities explored. Finally, an example of the application of the model to maturity guarantees under equity-linked insurance is presented. Equations for quantile and conditional tail expectation (Tail-VaR) risk measures are derived, and a numerical example compares the regime-switching lognormal model results with those using the more traditional lognormal stock return model.

Suggested Citation

  • Mary Hardy, 2001. "A Regime-Switching Model of Long-Term Stock Returns," North American Actuarial Journal, Taylor & Francis Journals, vol. 5(2), pages 41-53.
    • Handle: RePEc:taf:uaajxx:v:5:y:2001:i:2:p:41-53
    DOI: 10.1080/10920277.2001.10595984
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/10920277.2001.10595984
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/10920277.2001.10595984?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:uaajxx:v:5:y:2001:i:2:p:41-53. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/uaaj .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.