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The Variance Gamma Scaled Self-Decomposable Process in Actuarial Modelling

Listed author(s):
  • Conall O'Sullivan

    (University College Dublin)

  • Michael Moloney

    (Mercer IC)

Registered author(s):

    A scaled self-decomposable stochastic process put forward by Carr, Geman, Madan and Yor (2007) is used to model long term equity returns and options prices. This parsimonious model is compared to a number of other one-dimensional continuous time stochastic processes (models) that are commonly used in finance and the actuarial sciences. The comparisons are conducted along three dimensions: the models ability to fit monthly time series data on a number of different equity indices; the models ability to fit the tails of the times series and the models ability to calibrate to index option prices across strike price and maturities. The last criteria is becoming increasingly important given the popularity of capital gauranteed products that contain long term imbedded options that can be (at least partially) hedged by purchasing short term index options and rolling them over or purchasing longer term index options. Thus we test if the models can reproduce a typical implied volatility surface seen in the market.

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    File Function: First version, 2010
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    Paper provided by Geary Institute, University College Dublin in its series Working Papers with number 201030.

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    Length: 31 pages
    Date of creation: 29 Jun 2010
    Handle: RePEc:ucd:wpaper:201030
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