Normal-inverse Gaussian distribution
The normal-inverse Gaussian distribution (NIG) is a continuous probability distribution that is defined as the normal variance-mean mixture where the mixing density is the inverse Gaussian distribution. The NIG distribution was noted by Blaesild in 1977 as a subclass of the generalised hyperbolic distribution discovered by Ole Barndorff-Nielsen. In the next year Barndorff-Nielsen published the NIG in another paper. It was introduced in the mathematical finance literature in 1997.
tail heaviness (real)
asymmetry parameter (real)
scale parameter (real)
denotes a modified Bessel function of the third kind
The class of normal-inverse Gaussian distributions is closed under convolution in the following sense: if and are independent random variables that are NIG-distributed with the same values of the parameters and , but possibly different values of the location and scale parameters, , and , respectively, then is NIG-distributed with parameters and
The class of NIG distributions is a flexible system of distributions that includes fat-tailed and skewed distributions, and the normal distribution, arises as a special case by setting and letting .
The normal-inverse Gaussian distribution can also be seen as the marginal distribution of the normal-inverse Gaussian process which provides an alternative way of explicitly constructing it. Starting with a drifting Brownian motion (Wiener process), , we can define the inverse Gaussian process Then given a second independent drifting Brownian motion, , the normal-inverse Gaussian process is the time-changed process . The process at time 1 has the normal-inverse Gaussian distribution described above. The NIG process is a particular instance of the more general class of Lévy processes.
- Ole E Barndorff-Nielsen, Thomas Mikosch and Sidney I. Resnick, Lévy Processes: Theory and Applications, Birkhäuser 2013 Note: in the literature this function is also referred to as Modified Bessel function of the third kind
- Barndorff-Nielsen, Ole (1977). "Exponentially decreasing distributions for the logarithm of particle size". Proceedings of the Royal Society of London. Series A, Mathematical and Physical Sciences. The Royal Society. 353 (1674): 401–409. doi:10.1098/rspa.1977.0041. JSTOR 79167.
- O. Barndorff-Nielsen, Hyperbolic Distributions and Distributions on Hyperbolae, Scandinavian Journal of Statistics 1978
- O. Barndorff-Nielsen, Normal Inverse Gaussian Distributions and Stochastic Volatility Modelling, Scandinavian Journal of Statistics 1997
- S.T Rachev, Handbook of Heavy Tailed Distributions in Finance, Volume 1: Handbooks in Finance, Book 1, North Holland 2003
- Erik Bolviken, Fred Espen Beth, Quantification of Risk in Norwegian Stocks via the Normal Inverse Gaussian Distribution, Proceedings of the AFIR 2000 Colloquium
- Anna Kalemanova, Bernd Schmid, Ralf Werner, The Normal inverse Gaussian distribution for synthetic CDO pricing, Journal of Derivatives 2007
- Ole E Barndorff-Nielsen, Thomas Mikosch and Sidney I. Resnick, Lévy Processes: Theory and Applications, Birkhäuser 2013