Infinite-Variance Error Structure in Finance and Economics

Fatma Serttaş

International Econometric Review (IER), 2018, vol. 10, issue 1, 14-23

Abstract: Many macroeconomic and financial data exhibit large outliers and high volatility so that their returns are usually modeled to follow an infinite-variance stable process. Extreme behaviors in such data tend to exist especially for emerging markets due to frequent existence of high economic turmoil. A relatively new area of research studies that model the financial returns as infinite-variance stable errors exists for emerging markets as well as for industrialized countries. This study aims to briefly introduce the reader the concept of infinite-variance stable distributions, discuss some existing studies on unit root and cointegration tests that assume infinite-variance stable error structure, and then to point out the potential lines of research while showing the significance of this relatively new concept.

Keywords: Infinite-Variance Errors; Stable Distributions; Financial Returns; Unit Root Tests; Co-Integration Tests. (search for similar items in EconPapers)
JEL-codes: C21 C22 C32 (search for similar items in EconPapers)
Date: 2018
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