The Dynamic Power Law Model

31 Pages Posted: 13 May 2014  

Bryan T. Kelly

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Date Written: May 1, 2014

Abstract

I propose a new measure of common, time-varying tail risk for large cross sections of stock returns. Stock return tails are described by a power law in which the power law exponent is allowed to transition smoothly through time as a function of recent data. It is motivated by asset pricing theory and is estimable via quasi-maximum likelihood. Estimates indicate substantial time variation in stock return tails, and that the risk of extreme returns rises in weak economic conditions.

Suggested Citation

Kelly, Bryan T., The Dynamic Power Law Model (May 1, 2014). Chicago Booth Research Paper No. 14-14; Fama-Miller Working Paper . Available at SSRN: https://ssrn.com/abstract=2436102 or http://dx.doi.org/10.2139/ssrn.2436102

Bryan T. Kelly (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-8359 (Phone)

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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