A Generalized Normal Mean-Variance Mixture For Return Processes In Finance
AbstractTime-changed Brownian motions are extensively applied as mathematical models for asset returns in Finance. Time change is interpreted as a switch from calendar time to trade-related business time. Time-changed Brownian motions can be generated by infinitely divisible normal mixtures. The standard multivariate mixtures assume a common mixing variable. This corresponds to a multidimensional return process with a unique change of time for all assets under exam. The economic counterpart is uniqueness of trade or business time, which is not in line with empirical evidence. In this paper we propose a new multivariate definition of normal mixtures with a flexible dependence structure, based on the economic intuition of both a common and an idiosyncratic component of business time. We analyze both the distribution and the related process. We use the above construction to introduce a multivariate generalized hyperbolic process with generalized hyperbolic margins. We conclude with a stock market example to show the ease of calibration of the model.
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Bibliographic InfoArticle provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.
Volume (Year): 13 (2010)
Issue (Month): 03 ()
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Web page: http://www.worldscinet.com/ijtaf/ijtaf.shtml
Other versions of this item:
- Elisa Luciano & Patrizia Semeraro, 2008. "A Generalized Normal Mean Variance Mixture for Return Processes in Finance," Carlo Alberto Notebooks 97, Collegio Carlo Alberto, revised 2009.
- C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
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- Antonis Papapantoleon, 2011. "Computation of copulas by Fourier methods," Papers 1108.1216, arXiv.org.
- Elisa Luciano & Marina Marena & Patrizia Semeraro, 2013. "Factor-Based Time Changes: Properties and Fit," Carlo Alberto Notebooks 307, Collegio Carlo Alberto.
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