Journal
QUANTITATIVE FINANCE
Volume 10, Issue 8, Pages 883-893Publisher
ROUTLEDGE JOURNALS, TAYLOR & FRANCIS LTD
DOI: 10.1080/14697680903540381
Keywords
Financial returns; Finite variance; Infinite variance; Heavy tails; Bachelier-Samuelson model; Mandelbrot model
Categories
Funding
- NSF at Cornell University [EMSW21-RTG]
- ARO at Cornell University [W911NF-07-1-0078]
Ask authors/readers for more resources
One of the major points of contention in studying and modelling financial returns is whether or not the variance of the returns is finite or infinite (sometimes referred to as the Bachelier-Samuelson Gaussian world versus the Mandelbrot stable world). A different formulation of the question asks how heavy the tails of the financial returns are. The available empirical evidence can be, and has been, interpreted in more than one way. The apparent paradox, which has puzzled many a researcher, is that the tails appear to become less heavy for less frequent (e.g. monthly) returns than for more frequent (e.g. daily) returns, a phenomenon not easily explainable by the standard models. Inspired by the prelimit theorems of Klebanov, Rachev and Szekely (1999) and Klebanov, Rachev and Safarian (2000), we provide an explanation of this paradox. We show that, for financial returns, a natural family of models are those with tempered heavy tails. These models can generate observations that appear heavy tailed for a wide range of aggregation levels before becoming clearly light tailed at even larger aggregation scales. Important examples demonstrate the existence of a natural scale associated with the model at which such an apparent shift in the tails occurs.
Authors
I am an author on this paper
Click your name to claim this paper and add it to your profile.
Reviews
Recommended
No Data Available