Applications and Limitations of Stochastic Processes in Dealing with Fat-Tailed Return Distributions
Jose Carlos Ramirez-Sanchez
affiliation not provided to SSRN
June 1, 2004
Revista de Analisis Economico, Vol. 19, No. 1, 2004
This paper deals with the main theoretical problems regarding the application of stochastic processes to leptokurtic financial return distributions. A sort of statistical tests based on the stock index Banamex 30 is performed in order to choose the stochastic model that provide the best fit to the fat-tailed empirical distribution, allowing for a better return forecasting or value at risk estimate. In choosing that model the paper points out that any single set of stastistical criteria is not appropriate if it is not confronted with the risk manager's experience. Understanding the investor's aversion risk or the transaction costs involved in any trading strategy, among other elements, is very important to justify the use of any stochastic process in risk management techniques.
Note: Downloadable document is in Spanish.
Number of Pages in PDF File: 26
Keywords: stochastic process, leptokurtic financial return distribu-tions, return forecasting, value at risk estimate
JEL Classification: G11, C52Accepted Paper Series
Date posted: September 2, 2008
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo4 in 1.625 seconds