Estimating the distribution of volatility of realized stock returns and exchange rate changes

Mikael Linden

Physica A: Statistical Mechanics and its Applications, 2005, vol. 352, issue 2, 573-583

Abstract: Realized stock return volatility is modelled with a distribution based on the Laplace distribution. The moment properties of suggested volatility distribution, η(σ|λ), are derived. The properties of distribution correspond to the empirical regularities found in the finance literature. ML-estimator for λ is also provided. The advantage of Laplace approach lies in estimating λ from returns distribution f(x|λ) directly instead of volatility distribution based on bias sensitive standard deviation estimates. The goodness-to-fit tests with 5 day standard deviations of daily HEX closing price returns in period 3.1.1983–4.3.2003, daily S&P500 closing stock index returns in period 1.3.1950–27.3.2003 and daily USD/Euro exchange rate changes in period 28.12.1978–28.2.2003 support the suggested volatility distribution model.

Keywords: Volatility; Stock return and exchange rate distributions; Laplace distribution; ML-estimation (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:352:y:2005:i:2:p:573-583

DOI: 10.1016/j.physa.2004.12.024

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