An empirical evaluation of fat-tailed distributions in modeling financial time series

Mike K.P. So, Cathy W. S. Chen (), Jen-Yu Lee and Yi-Ping Chang

Mathematics and Computers in Simulation (MATCOM), 2008, vol. 77, issue 1, 96-108

Abstract: There is substantial evidence that many financial time series exhibit leptokurtosis and volatility clustering. We compare the two most commonly used statistical distributions in empirical analysis to capture these features: the t distribution and the generalized error distribution (GED). A Bayesian approach using a reversible-jump Markov chain Monte Carlo method and a forecasting evaluation method are adopted for the comparison. In the Bayesian evaluation of eight daily market returns, we find that the fitted t error distribution outperforms the GED. In terms of volatility forecasting, models with t innovations also demonstrate superior out-of-sample performance.

Keywords: Bayesian; GARCH models; Generalized error distribution; Reversible-jump (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:matcom:v:77:y:2008:i:1:p:96-108

DOI: 10.1016/j.matcom.2007.02.008

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