Göncü, Ahmet Xi’an Jiaotong Liverpool University - Department of Mathematical Sciences, China , Karahan, Mehmet Oğuz Boğaziçi University - Center for Economics and Econometrics, Turkey , Kuzubaş, Tolga Umut Boğaziçi University - Department of Economics, Turkey

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

37358

Variance-Gamma model is widely used for option pricing; however there has been little research on the 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 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 the maximum likelihood method.

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Variance , Gamma model , goodness , of , fit , emerging markets.

Bogazici Journal

10