Fitting the Variance-Gamma Model: A Goodness-of-Fit Check for Emerging Markets

Variance-Gamma model is widely used for option pricing; however there has been little research on empirical performance of this model for emerging market economies. In this paper, we evaluate the goodness-of-fit of the Variance-Gamma model using index returns data from ten different emerging markets. Based on the Chi-square, Anderson-Darling and Kolmogorov-Smirnov goodness-of-fit test statistics, we show that the Variance-Gamma model fits to the dataset well and improves upon the fit of the normal distribution for emerging stock market indices. Furthermore, under the Variance–Gamma model, closed form solutions for pricing European call and put options exist and model parameters can be efficiently estimated via maximum likelihood method.