Heavy-Tail Distribution from Correlation of Discrete Stochastic Process

Jongwook Kim and Teppei Okumura

Papers from arXiv.org

Abstract: We propose a stochastic process driven by the memory effect with novel distributions which include both exponential and leptokurtic heavy-tailed distributions. A class of the distributions is analytically derived from the continuum limit of the discrete binary process with the renormalized auto-correlation. The moment generating function with a closed form is obtained, thus the cumulants are calculated and shown to be convergent. The other class of the distributions is numerically investigated. The combination of the two stochastic processes of memory with different signs under regime switching mechanism does result in behaviors of power-law decay. Therefore we claim that memory is the alternative origin of heavy-tail.

Date: 2012-03
New Economics Papers: this item is included in nep-ecm and nep-ets
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