The Asymptotics of Extreme Returns in the Australian Stock Market

28 Pages Posted: 25 Aug 2009

See all articles by Nagaratnam Jeyasreedharan

Nagaratnam Jeyasreedharan

University of Tasmania; Financial Research Network (FIRN)

Lakshman Alles

Curtin University of Technology - Department of Finance

Nihal Dayaratne Yatawara

Curtin University of Technology

Date Written: August 23, 2009

Abstract

Empirical analysis of financial data such as the daily, weekly or monthly prices of assets such as bonds, stocks, currencies and commodities have shown that asset prices approximately follow a martingale process, but the distribution of asset returns tend to be fat-tailed. This paper examines the extreme daily, weekly and monthly returns on the Australian stock market using order statistics and extreme value theory. Using data from the Australian Stock Exchange for the period 1990 to 2001 (11 years), the extreme returns are found to belong to a range of extremevalued family of distributions. The distribution of the underlying returns generating process is found to be conditional on the blocksizes used. The maximal and minimal returns have differing distributions and are correlated indicating a possible bivariate returns generating process. Further, extreme returns are found to be weakly correlated implicating possible volatility clustering of the extreme returns.

Keywords: Order statistics, extreme value theory, thin-tails and fat-tails

JEL Classification: G10, G12, G14

Suggested Citation

Jeyasreedharan, Nagaratnam and Alles, Lakshman and Yatawara, Nihal Dayaratne, The Asymptotics of Extreme Returns in the Australian Stock Market (August 23, 2009). 22nd Australasian Finance and Banking Conference 2009. Available at SSRN: https://ssrn.com/abstract=1460371 or http://dx.doi.org/10.2139/ssrn.1460371

Nagaratnam Jeyasreedharan (Contact Author)

University of Tasmania ( email )

Private Bag 85
Hobart, Tasmania 7001
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Lakshman Alles

Curtin University of Technology - Department of Finance ( email )

Bentley 6102 WA
Australia

Nihal Dayaratne Yatawara

Curtin University of Technology ( email )

Bentley, WA 6148
Australia

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