How money got its tail (not too light; not too heavy; but “just so”)

Michael R. Powers

Journal of Risk Finance, 2009, vol. 10, issue 5, 425-429

Abstract: Purpose - The purpose of this paper is to explore the theoretical basis for heavy‐tailed asset‐return distributions. Design/methodology/approach - Through a simple model of asset‐price formation, one can formulate the asset‐return random variable, ln (Pt/Pt−1), as a constant plus the natural log of a ratio of Bernoulli proportions. This random variable admits of different approximations, whose distributions may be studied analytically. Findings - The paper finds that for two reasonable approximations to the asset‐return random variable, the tails are approximately exponential. This suggests that the Gaussian assumption provides a poor “starting point” for asset‐pricing models, and empirically validated heavy‐tailed behavior is likely the result of time‐dependent components in the tail parameters. Originality/value - The editorial offers a theoretical analysis of asset‐return distributions using parsimonious modeling assumptions.

Keywords: Assets; Return on capital employed; Prices (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jrfpps:15265940911001358

DOI: 10.1108/15265940911001358

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