The Dynamic Power Law Model

31 Pages Posted: 13 May 2014

See all articles by Bryan T. Kelly

Bryan T. Kelly

Yale SOM; AQR Capital Management, LLC; 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)

Yale SOM ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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