Models for Heavy-tailed Asset Returns
Szymon Borak,
Adam Misiorek and
Rafał Weron
No HSC/10/01, HSC Research Reports from Hugo Steinhaus Center, Wroclaw University of Science and Technology
Abstract:
Many of the concepts in theoretical and empirical finance developed over the past decades – including the classical portfolio theory, the Black-Scholes-Merton option pricing model or the RiskMetrics variance-covariance approach to VaR – rest upon the assumption that asset returns follow a normal distribution. But this assumption is not justified by empirical data! Rather, the empirical observations exhibit excess kurtosis, more colloquially known as fat tails or heavy tails. This chapter is intended as a guide to heavy-tailed models. We first describe the historically oldest heavy-tailed model – the stable laws. Next, we briefly characterize their recent lighter-tailed generalizations, the socalled truncated and tempered stable distributions. Then we study the class of generalized hyperbolic laws, which – like tempered stable distributions – can be classified somewhere between infinite variance stable laws and the Gaussian distribution. Finally, we provide numerical examples.
Keywords: Heavy-tailed distribution; Stable distribution; Tempered stable distribution; Generalized hyperbolic distribution; Asset return; Random number generation; Parameter estimation (search for similar items in EconPapers)
JEL-codes: C13 C15 C16 G32 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)
Downloads: (external link)
http://www.im.pwr.wroc.pl/~hugo/RePEc/wuu/wpaper/HSC_10_01.pdf Original version, 2010 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to kkm.im.pwr.edu.pl:443 (Bad file descriptor) (http://www.im.pwr.wroc.pl/~hugo/RePEc/wuu/wpaper/HSC_10_01.pdf [301 Moved Permanently]--> https://kkm.im.pwr.edu.pl/~hugo/RePEc/wuu/wpaper/HSC_10_01.pdf)
Related works:
Working Paper: Models for Heavy-tailed Asset Returns (2010) 
Working Paper: Models for heavy-tailed asset returns (2010) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:wuu:wpaper:hsc1001
Access Statistics for this paper
More papers in HSC Research Reports from Hugo Steinhaus Center, Wroclaw University of Science and Technology Contact information at EDIRC.
Bibliographic data for series maintained by Rafal Weron ().