Compound distributions for financial returns

Emmanuel Afuecheta, Artur Semeyutin, Stephen Chan, Saralees Nadarajah and Diego Andrés Pérez Ruiz

PLOS ONE, 2020, vol. 15, issue 10, 1-25

Abstract: In this paper, we propose six Student’s t based compound distributions where the scale parameter is randomized using functional forms of the half normal, Fréchet, Lomax, Burr III, inverse gamma and generalized gamma distributions. For each of the proposed distribution, we give expressions for the probability density function, cumulative distribution function, moments and characteristic function. GARCH models with innovations taken to follow the compound distributions are fitted to the data using the method of maximum likelihood. For the sample data considered, we see that all but two of the proposed distributions perform better than two popular distributions. Finally, we perform a simulation study to examine the accuracy of the best performing model.

Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:plo:pone00:0239652

DOI: 10.1371/journal.pone.0239652

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