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Exact inference and optimal invariant estimation for the stability parameter of symmetric [alpha]-stable distributions

Jean-Marie Dufour () and Kurz-Kim, Jeong-Ryeol

Journal of Empirical Finance, 2010, vol. 17, issue 2, 180-194

Abstract: Hill estimation (Hill, 1975), the most widespread method for estimating tail thickness of heavy-tailed financial data, suffers from two drawbacks. One is that the optimal number of tail observations to use in the estimation is a function of the unknown tail index being estimated, which diminishes the empirical relevance of the Hill estimation. The other is that the hypothesis test of the underlying data lying in the domain of attraction of an [alpha]-stable law ([alpha]Â =Â 2) for finite samples, is performed on the basis of the asymptotic distribution, which can be different from those for finite samples. In this paper, using the Monte Carlo technique, we propose an exact test method for the stability parameter of [alpha]-stable distributions which is based on the Hill estimator, yet is able to provide exact confidence intervals for finite samples. Our exact test method automatically includes an estimation procedure which does not need the assumption of a known number of observations on the distributional tail. Empirical applications demonstrate the advantages of our new method in comparison with the Hill estimation.

Keywords: [alpha]-Stable; distribution; Hill; estimator; Monte; Carlo; test; Hodges-Lehmann; estimator; Exact; confidence; interval; Finite; sample (search for similar items in EconPapers)
Date: 2010
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