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Multivariate Models of Equity Returns for Investment Guarantees Valuation

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  • Mathieu Boudreault
  • Christian-Marc Panneton

Abstract

In this paper we investigate the valuation of investment guarantees in a multivariate (discrete-time) framework. We present how to build multivariate models in general, and we survey the most important multivariate GARCH models. A direct multivariate application of regime-switching models is also discussed, as is the estimation of these models using maximum likelihood and their comparison in a multivariate setting. The computation of the CTE provision is further presented. We have estimated the models with a multivariate dataset (Canada, United States, United Kingdom, and Japan), and we compared the quality of their fit using multiple criteria and tests. We observe that multivariate GARCH models provide a better overall fit than regime-switching models. However, regime-switching models appropriately represent the fat tails of the returns distribution, which is where most GARCH models fail. This leads to significant differences in the value of the CTE provisions, and, in general, provisions computed with regime-switching models are higher. Thus, the results from this multivariate analysis are in line with what was obtained in the literature of univariate models.

Suggested Citation

  • Mathieu Boudreault & Christian-Marc Panneton, 2009. "Multivariate Models of Equity Returns for Investment Guarantees Valuation," North American Actuarial Journal, Taylor & Francis Journals, vol. 13(1), pages 36-53.
    • Handle: RePEc:taf:uaajxx:v:13:y:2009:i:1:p:36-53
    DOI: 10.1080/10920277.2009.10597539
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    Cited by:

    1. Ng, Andrew C.Y. & Li, Johnny Siu-Hang & Chan, Wai-Sum, 2013. "Pricing options on stocks denominated in different currencies: Theory and illustrations," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 339-354.
    2. Herv'e Andr`es & Alexandre Boumezoued & Benjamin Jourdain, 2022. "Signature-based validation of real-world economic scenarios," Papers 2208.07251, arXiv.org, revised Apr 2024.

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