Broken Symmetry in Stock Returns: A Modified Distribution
Analysis
This paper addresses the asymmetry observed in stock returns (negative skew and positive mean) by proposing a modified Jones-Faddy skew t-distribution. The core argument is that the asymmetry arises from the differing stochastic volatility governing gains and losses. The paper's significance lies in its attempt to model this asymmetry with a single, organic distribution, potentially improving the accuracy of financial models and risk assessments. The application to S&P500 returns and tail analysis suggests practical relevance.
Key Takeaways
- •Addresses the asymmetry (negative skew, positive mean) in stock returns.
- •Proposes a modified Jones-Faddy skew t-distribution to model this asymmetry.
- •Attributes the asymmetry to differing stochastic volatility for gains and losses.
- •Applies the model to S&P500 returns and analyzes tails.
Reference / Citation
View Original"The paper argues that the distribution of stock returns can be effectively split in two -- for gains and losses -- assuming difference in parameters of their respective stochastic volatilities."