Robustly Modelling the Scale and Shape Dynamics of Stock Return Distributions

36 Pages Posted: 15 May 2016 Last revised: 1 Feb 2018

See all articles by Jim E. Griffin

Jim E. Griffin

University College London

Gelly Mitrodima

London School of Economics & Political Science (LSE) - Department of Statistics

Jaideep S. Oberoi

SOAS University of London - Centre for Financial and Management Studies

Date Written: February 1, 2018

Abstract

We explore time variation in the shape of the conditional return distribution using a model of multiple quantiles. We propose a joint model of scale (proxied by the interquartile range) and other quantiles standardised by the scale. The model allows us to capture the scale and shape of the distribution in one step without making assumptions about the distribution of the underlying conditional shocks from the outset. We find that, once we capture the dynamics of the scale effectively, the time variation in the shape allows a simpler interpretation. The method is illustrated by application to stock price and stock index data and provides evidence that the conditional return distribution becomes heavier tailed at times of market stress.

Keywords: Dynamic multivariate quantile model, Return decomposition, Robust methods, CAViaR model

JEL Classification: C14, C22, C50, G19

Suggested Citation

Griffin, Jim E. and Mitrodima, Gelly and Oberoi, Jaideep S., Robustly Modelling the Scale and Shape Dynamics of Stock Return Distributions (February 1, 2018). Available at SSRN: https://ssrn.com/abstract=2777214 or http://dx.doi.org/10.2139/ssrn.2777214

Jim E. Griffin (Contact Author)

University College London ( email )

1-19 Torrington Place
London, WC1 7HB
United Kingdom

Gelly Mitrodima

London School of Economics & Political Science (LSE) - Department of Statistics ( email )

Houghton Street
London, England WC2A 2AE
United Kingdom

Jaideep S. Oberoi

SOAS University of London - Centre for Financial and Management Studies ( email )

Thornhaugh Street
Russell Square
London, WC1H 0XG
United Kingdom

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