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Fitting the Variance-Gamma Model: A Goodness-of-Fit Check for Emerging Markets

Author

Listed:
  • Ahmet Göncü
  • Mehmet Oguz Karahan
  • Tolga Umut Kuzubas

Abstract

Variance-Gamma model is widely used for option pricing; however there has been little research on empirical performance of this model for emerging market economies. In this paper, we evaluate the goodness-of-fit of the Variance-Gamma model using index returns data from ten different emerging markets. Based on the Chi-square, Anderson-Darling and Kolmogorov-Smirnov goodness-of-fit test statistics, we show that the Variance-Gamma model fits to the dataset well and improves upon the fit of the normal distribution for emerging stock market indices. Furthermore, under the Variance–Gamma model, closed form solutions for pricing European call and put options exist and model parameters can be efficiently estimated via maximum likelihood method.

Suggested Citation

  • Ahmet Göncü & Mehmet Oguz Karahan & Tolga Umut Kuzubas, 2013. "Fitting the Variance-Gamma Model: A Goodness-of-Fit Check for Emerging Markets," Bogazici Journal, Review of Social, Economic and Administrative Studies, Bogazici University, Department of Economics, vol. 27(2), pages 1-10.
  • Handle: RePEc:boz:journl:v:27:y:2013:i:2:p:1-10
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    File URL: http://www.bujournal.boun.edu.tr/docs/140073455827_2_1.pdf
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    References listed on IDEAS

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    1. Bekaert, Geert & Harvey, Campbell R., 1997. "Emerging equity market volatility," Journal of Financial Economics, Elsevier, vol. 43(1), pages 29-77, January.
    2. Harvey, Campbell R, 1995. "Predictable Risk and Returns in Emerging Markets," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 773-816.
    3. Gencay, Ramazan & Selcuk, Faruk, 2004. "Extreme value theory and Value-at-Risk: Relative performance in emerging markets," International Journal of Forecasting, Elsevier, vol. 20(2), pages 287-303.
    4. R. Cont, 2001. "Empirical properties of asset returns: stylized facts and statistical issues," Quantitative Finance, Taylor & Francis Journals, vol. 1(2), pages 223-236.
    5. Elton A. Daal & Dilip B. Madan, 2005. "An Empirical Examination of the Variance-Gamma Model for Foreign Currency Options," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2121-2152, November.
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    Cited by:

    1. Mosiño, Alejandro & Salomón-Núñez, Laura A. & Moreno-Okuno, Alejandro T., 2017. "Estudio empírico sobre el tipo de cambio MXN/USD: Movimiento Browniano Geométrico vs. Proceso Varianza-Gamma [Empirical analysis of the MXN/USD exchange rate: geometric Brownian motion vs. variance," MPRA Paper 78961, University Library of Munich, Germany.
    2. Alejandro Mosiño & Alejandro Tatsuo Moreno-Okuno, 2018. "On modeling fossil fuel prices: geometric Brownian motion vs. variance-gamma process," Economics Bulletin, AccessEcon, vol. 38(1), pages 509-519.

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