The Innovation Distributions

Gilles Zumbach
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Gilles Zumbach: Consulting in Financial Research

Chapter Chapter 13 in Discrete Time Series, Processes, and Applications in Finance, 2013, pp 197-203 from Springer

Abstract: Abstract The distribution of the innovations is the second most important component in a process. With a good understanding of the heteroskedasticity, the distribution of the empirical innovations can be studied. A normal distribution can be clearly rejected, regardless of the model used for the heteroskedasticity. A Student distribution with a number of degrees of freedom around 5 gives a simple and good characterization of the empirical distributions. This shows that the fat tail observed in the return distributions is mostly generated by the innovations, while the volatility feed-back mechanism plays a small role.

Keywords: Return Distribution; Innovation Distribution; Tail Behavior; Volatility Forecast; Unconditional Distribution (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/978-3-642-31742-2_13

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