The structure of financial returns

Dilip B. Madan and King Wang

Finance Research Letters, 2021, vol. 40, issue C

Abstract: Financial returns at unit time are modeled as non-Gaussian limit laws. They may reflect random walks or additive processes reflecting some predictability. Mixtures of these two constructions are formulated and estimated on one minute data. It is observed that the random walk fraction is generally below 10%. The results argue against a strict random walk in favor of the presence of a predictable component representing returns as perpetual motion machines responding to the larger past price movements.

Keywords: Bilateral gamma; CGMY; Sato process; Random walk (search for similar items in EconPapers)
JEL-codes: G10 G17 G19 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:40:y:2021:i:c:s1544612320300799

DOI: 10.1016/j.frl.2020.101665

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