Augmented Dynamic Gordon Growth 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.

Tasks

Reproductions