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The Dynamic Power Law Model

31 Pages Posted: 13 May 2014  

Bryan T. Kelly

University of Chicago - Finance; National Bureau of Economic Research (NBER)

Date Written: May 1, 2014


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: or

Bryan T. Kelly (Contact Author)

University of Chicago - Finance ( email )

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National Bureau of Economic Research (NBER) ( email )

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