A Regime-Switching Model of Long-Term Stock Returns

Mary Hardy

North American Actuarial Journal, 2001, vol. 5, issue 2, 41-53

Abstract: In this paper I first define the regime-switching lognormal model. Monthly data from the Standard and Poor’s 500 and the Toronto Stock Exchange 300 indices are used to fit the model parameters, using maximum likelihood estimation. The fit of the regime-switching model to the data is compared with other common econometric models, including the generalized autoregressive conditionally heteroskedastic model. The distribution function of the regime-switching model is derived. Prices of European options using the regime-switching model are derived and implied volatilities explored. Finally, an example of the application of the model to maturity guarantees under equity-linked insurance is presented. Equations for quantile and conditional tail expectation (Tail-VaR) risk measures are derived, and a numerical example compares the regime-switching lognormal model results with those using the more traditional lognormal stock return model.

Date: 2001
References: Add references at CitEc
Citations: View citations in EconPapers (122)

Downloads: (external link)
http://hdl.handle.net/10.1080/10920277.2001.10595984 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:uaajxx:v:5:y:2001:i:2:p:41-53

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/uaaj20

DOI: 10.1080/10920277.2001.10595984

Access Statistics for this article

North American Actuarial Journal is currently edited by Kathryn Baker

More articles in North American Actuarial Journal from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().