Comparison of the Tails of Market Return Distributions

• Authors: Koronkiewicz, Grzegorz , Jamróz, Paweł

Abstracts

EN

The aim of this study is to analyze the tails of the distributions of stock market returns and to compare the differences between them. It is a well-established fact that the vast majority of stock market return distributions exhibit fat tails (a bigger probability of extreme outcomes then in the case of the normal probability). Apart from that, there seems to be a popular opinion that most market returns are negatively skewed with a fatter left tail. The study utilizes two methods for comparing the tails of a distribution. A simple approached based on the sample kurtosis, with a modification that allows for the calculation of kurtosis separately for the right and the left tail of a single distribution and a more complex approach based on the maximum likelihood fitting of the Generalized Pareto Distribution to both tales of standardized return distributions. The second approach is based on the assumptions of the Extreme Value Theory (EVT) and the Pickands-Balkema-de Haan theorem. Both approaches provide similar conclusions. Results suggest that whether the left or the right tail of the return distribution is bigger varies from market to market. All four major equity indices of the Polish Warsaw Stock Exchange exhibited a fatter left tale. However, in the whole sample it was actually more common for the right tail to be heavier, with 12 indices out of 20 exhibiting a fatter right tail then the left. The sample kurtosis indicated that all stock market return’s distributions were heavy tailed, whereas the estimates of Generalized Pareto Distribution parameters did indicate standard or thin tails in two cases. Statistical tests indicate that the differences between the tails of stock market distributions are not statistically significant

Keywords

EN

Stock-market returns; fat tails; Extreme Value Theory; Generalized Pareto Distribution

• Publisher: Wydawnictwo Uniwersytetu w Białymstoku
• Journal: Optimum. Studia Ekonomiczne
• Year: 2014
• Volume: 5(71)

Dates

published

2014

Contributors

author

Koronkiewicz, Grzegorz

author

Jamróz, Paweł

Identifiers

URI

http://hdl.handle.net/11320/2905

DOI

10.15290/ose.2014.05.71.08