Augmented Dynamic Gordon Growth Model
Battulga Gankhuu
TL;DR
This paper presents an augmented dynamic Gordon growth model incorporating time-varying interest rates, providing new valuation and hedging formulas for options and insurance products, along with a machine learning estimator.
Contribution
It introduces a novel dynamic model with time-varying interest rates and derives new pricing, hedging formulas, and an ML estimator for financial derivatives.
Findings
Derived pricing formulas for options and insurance products.
Developed a machine learning estimator for the model.
Provided hedging strategies based on the model.
Abstract
In this paper, we introduce a dynamic Gordon growth model, which is augmented by a time--varying spot interest rate and the Gordon growth model for dividends. Using the risk--neutral valuation method and locally risk--minimizing strategy, we obtain pricing and hedging formulas for the dividend--paying European call and put options and equity--linked life insurance products. Also, we provide ML estimator of the model.
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Taxonomy
TopicsStochastic processes and financial applications · Insurance, Mortality, Demography, Risk Management · Probability and Risk Models