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Generalized Normal Mean Variance Mixture and Subordinated Brownian Motion

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  • Elisa Luciano
  • Patrizia Semeraro

Abstract

Normal mean variance mixtures are extensively applied in finance. Under conditions for infinite divisibility they generate subordinated Brownian motions, used to represent stocks returns. The standard generalization to the multivariate setting of normal mean variance mixture does not allow for independence and can incorporate only limited dependence. In this paper we propose a multivariate definition of normal mean variance mixture, named generalized normal mean variance mixture, which includes both independence and high dependence. We give conditions for infinite divisibility and prove that the multivariate Lévy process defined from it is a subordinated Brownian motion. We analyze both the distribution and the related process. In the second part of the paper we use the construction to introduce a multivariate generalized hyperbolic distribution (and process) with generalized hyperbolic margins. We conclude with a numerical example to show the case of calibration and the flexibility of the model in describing dependence.

Suggested Citation

  • Elisa Luciano & Patrizia Semeraro, 2007. "Generalized Normal Mean Variance Mixture and Subordinated Brownian Motion," ICER Working Papers - Applied Mathematics Series 42-2007, ICER - International Centre for Economic Research.
    • Handle: RePEc:icr:wpmath:42-2007
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    References listed on IDEAS

    as
    1. Elisa Luciano & Patrizia Semeraro, 2007. "Extending Time-Changed Lévy Asset Models Through Multivariate Subordinators," Carlo Alberto Notebooks 42, Collegio Carlo Alberto.
    2. Patrizia Semeraro, 2006. "A Multivariate Time-Changed Lévy Model for Financial Applications," ICER Working Papers - Applied Mathematics Series 10-2006, ICER - International Centre for Economic Research.
    3. Sato, Ken-iti, 2001. "Subordination and self-decomposability," Statistics & Probability Letters, Elsevier, vol. 54(3), pages 317-324, October.
    4. Schmidt, Rafael & Hrycej, Tomas & Stutzle, Eric, 2006. "Multivariate distribution models with generalized hyperbolic margins," Computational Statistics & Data Analysis, Elsevier, vol. 50(8), pages 2065-2096, April.
    5. Peter Carr & Helyette Geman, 2002. "The Fine Structure of Asset Returns: An Empirical Investigation," The Journal of Business, University of Chicago Press, vol. 75(2), pages 305-332, April.
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