Price limits as an explanation of thin-tailedness in pork bellies futures prices
✍ Scribed by Seung-Ryong Yang; B. Wade Brorsen
- Publisher
- John Wiley and Sons
- Year
- 1995
- Tongue
- English
- Weight
- 673 KB
- Volume
- 15
- Category
- Article
- ISSN
- 0270-7314
No coin nor oath required. For personal study only.
✦ Synopsis
Knowing the price distribution is important in financial economics. Equilibrium models such as the capital asset pricing model, option pricing models, and portfolio models of asset allocation are based on assumptions about the distribution of prices.
Much research has attempted to approximate the return generating process in futures markets. Two important findings have emerged. First, the unconditional distribution of most futures returns is leptokurtic [e.g., Cornew, Town, and Crowson (1984); Hall, Brorsen, and Irwin (1 989)]. A leptokurtic, or fat-tailed, distribution has more observations around the mean and in the extreme tails than a normal distribution.
In practice, this implies that extremely high or low returns are more likely than with a normal distribution. Second, most futures returns are conditionally heteroskedastic [e.g., Connolly ( 1989);Fujihara and Park (1990); Yang and Brorsen (1993)l. This implies that current return variability can be explained by past information. Further, the conditional heteroskedasticity guarantees unconditionally