On the distribution of stock-market returns - Implications of Evolutionary Finance

Stefan Reimann

No 232, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

Abstract: Risk management and asset pricing benefit from simple functional descriptions of the distribution of real asset returns. Recently, several authors have proposed that asset returns in real stock markets are distributed according to a hyperbolic distribution. While asset returns are generated by trades over time, the natural question is: What does economic theory imply concerning return distributions? We propose a simple model of price formation and, thus, return distribution which is based on economic reasoning. The markets behavior is represented by a pair consisting of a time-constant strategy and a dynamical trading strategy generating a flow between funds. Simulations of the price dynamics generate returns with fat-tail behavior in line with that of a hyperbolic distribution.

Keywords: Asset returns; hyperbolic distribution; evolutionary finance (search for similar items in EconPapers)
JEL-codes: C51 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-evo, nep-fin and nep-fmk
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