Market-Based Probability of Stock Returns

Victor Olkhov

Papers from arXiv.org

Abstract: This paper describes the dependence of market-based statistical moments of returns on statistical moments and correlations of the current and past trade values. We use Markowitz's definition of value weighted return of a portfolio as the definition of market-based average return of trades during the averaging period. Then we derive the dependence of market-based volatility and higher statistical moments of returns on statistical moments, volatilities, and correlations of the current and past trade values. We derive the approximations of the characteristic function and the probability of returns by a finite number q of market-based statistical moments. To forecast market-based average and volatility of returns at horizon T, one should predict the first two statistical moments and correlation of current and past trade values at the same horizon. We discuss the economic reasons that limit the number of predicted statistical moments of returns by the first two. That limits the accuracy of the forecasts of probability of returns by the accuracy of the Gaussian approximations. To improve the reliability of large macroeconomic and market models like BlackRock's Aladdin, JP Morgan, and the U.S. Fed., the developers should use market-based statistical moments of returns.

Date: 2023-02, Revised 2024-12
New Economics Papers: this item is included in nep-fmk and nep-rmg
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Citations: View citations in EconPapers (3)

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http://arxiv.org/pdf/2302.07935 Latest version (application/pdf)

Related works:
Working Paper: The Market-Based Probability of Stock Returns (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2302.07935

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