The Distribution of Returns at Longer Horizons

Ernst Eberlein and Dilip B. Madan
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Ernst Eberlein: Department of Mathematical Stochastics, University of Freiburg, Germany
Dilip B. Madan: Robert H. Smith School of Business, University of Maryland, USA

Chapter 1 in Recent Advances in Financial Engineering 2010, 2011, pp 1-18 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractLonger horizon returns are constructed from data on daily returns. Observed drawbacks of a Lévy process are a sharp decrease in skewness and excess kurtosis. Drawbacks to scaling are a flat term structure of skewness and excess kurtosis. A strategy that combines some exposure to independent increments and some exposure to scaling is developed in the context of self decomposable daily return distributions. Estimations are conducted on 400 stocks and we report that a good strategy for constructing longer horizon returns can be that of accumulating as i.i.d. half the daily return while scaling the remainder at rate one half.

Keywords: Operations Research; Financial Engineering; Management; Mathematical Modeling; Credit Risk; Real Options; Optimal Investment; Heterogeneous Beliefs (search for similar items in EconPapers)
Date: 2011
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