Do Stock Returns Follow a Finite Variance Distribution?

Qi-Man Shao, Hao Yu and Jun Yu
Additional contact information
Qi-Man Shao: Department of Mathematics, University of Oregon Eugene
Hao Yu: Department of Statistical and Actuarial Sciences, The University of Western Ontario London

Annals of Economics and Finance, 2001, vol. 2, issue 2, 467-486

Abstract: In this paper we propose a test statistic to discriminate between models with finite variance and models with infinite variance. The test statistic is the ratio of the sample standard deviation and the sample interquartile range. Both asymptotic and finite sample properties of the test statistic are discussed. We show that the test has good power properties against infinite-variance distributions and has small size distortions in finite samples. The statistic is applied to compare the competing models for S&P 500 index returns. Our test cannot reject most distributions with finite variance for both a pre-crash sample and a post-crash sample, and hence supports the literature. However, for a sample including crash days, our test suggests that the finite-variance distributions must be rejected.

Keywords: Stock Returns; Infinite Variance; Interquartile Range (search for similar items in EconPapers)
JEL-codes: C12 C14 C15 (search for similar items in EconPapers)
Date: 2001
References: View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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