Empirical Distributions of Daily Equity Index Returns: A Comparison
Expert Systems with Applications Vol. 54, 2016
Posted: 27 Jun 2015 Last revised: 7 Sep 2017
Date Written: November 11, 2015
The normality assumption concerning the distribution of equity returns has long been challenged both empirically and theoretically. Alternative distributions have been proposed to better capture the characteristics of equity return data. This paper investigates the ability of five alternative distributions to represent the behavior of daily equity index returns over the period 1979–2014: the skewed Student-t distribution, the generalized lambda distribution, Johnson system of distributions, the normal inverse Gaussian distribution, and the g-and-h distribution. We find that the generalized lambda distribution is a prominent alternative for modeling the behavior of daily equity index returns.
Keywords: Index returns, generalized lambda, Johnson translation system, skewed-t, normal inverse gaussian, g-and-h
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