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The origin of fat-tailed distributions in financial time series

✍ Scribed by G.M. Viswanathan; U.L. Fulco; M.L. Lyra; M. Serva

Publisher: Elsevier Science
Year: 2003
Tongue: English
Weight: 130 KB
Volume: 329
Category: Article
ISSN: 0378-4371
DOI: 10.1016/s0378-4371(03)00608-3

No coin nor oath required. For personal study only.

✦ Synopsis

A classic problem in physics is the origin of fat-tailed distributions generated by complex systems. We study the distributions of stock returns measured over di erent time lags . We ÿnd that destroying all correlations without changing the = 1 d distribution, by shu ing the order of the daily returns, causes the fat tails to almost vanish for ¿ 1 d. We argue that the fat tails are caused by the well-known long-range volatility correlations that have already been systematically studied previously. Indeed, destroying only sign correlations, by shu ing the order of only the signs (but not the absolute values) of the daily returns, allows the fat tails to persist for ¿ 1 d.

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