Why Heavy Tails?

David E. Harris

University of Great Falls

July 30, 2013

Why does the distribution of returns on equity securities have fat tails? Why do the normative models generate empirical contradictions? Using both Bayesian and Frequentist methodologies, it is shown that the models of mean-variance finance do not follow from first principles and are not valid scientific models. This paper proposes first principles mechanisms to reconcile observations and economic principles and empirically tests the proposed alternative model.

Keywords: Capital Asset Pricing Model, Arbitrage Pricing Theory, Black-Scholes Option Pricing Model, Capital, Inventory, Greater than Unit Root Processes, Cauchy Distribution

JEL Classification: B41, D80, D81, D84, E22, E44, G10, G11, G12, G14

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Date posted: September 19, 2010 ; Last revised: August 29, 2015

Suggested Citation

Harris, David E., Why Heavy Tails? (July 30, 2013). Available at SSRN: https://ssrn.com/abstract=1678726 or http://dx.doi.org/10.2139/ssrn.1678726

Contact Information

David E. Harris (Contact Author)
University of Great Falls ( email )
1301 20th Street South
Great Falls, MT 59405
United States
4067915341 (Phone)
4067915990 (Fax)
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