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The Variance Gamma (V.G.) Model for Share Market Returns
Dilip B. Madan and Eugene Seneta
The Journal of Business
Vol. 63, No. 4 (Oct., 1990), pp. 511-524
Published by: The University of Chicago Press
Stable URL: http://www.jstor.org/stable/2353303
Page Count: 14
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A new stochastic process, termed the V.G. (Variance Gamma) process, is proposed as a model for the uncertainty underlying security prices. The unit period distribution is normal conditional on a variance that is distributed as a gamma variate. Its advantages include long tailedness, continuous-time specification, finite moments of all orders, elliptical multivariate unit period distributions, and good empirical fit. The process is pure jump, approximable by a compound Poisson process with high jump frequency and low jump magnitudes. Applications to options on the money, compared to, in, or out of the money.
The Journal of Business © 1990 The University of Chicago Press