What Do We Know About the Second Moment of Financial Markets?

33 Pages Posted: 7 Jun 2021

See all articles by Klaus Grobys

Klaus Grobys

University of Vaasa; University of Jyväskyla

Date Written: May 6, 2021


Recent research shows that the vast majority of scientific studies published in leading finance journals fails scientific replication (Hou, Xue, and Zhang, 2020; Harvey, Liu, and Zhu; 2016). This study argues that p-hacking, publication pressure and the selection bias from leading finance journals are perhaps not the underlying root cause for this issue. We show that standard methodologies often used in finance research are inevitably sample-specific due to the very nature of financial markets. While the consensus of earlier research postulates a rejection of the time-honored Levy hypothesis, our results strongly indicate that the variance of variance does not exist in any of the financial key markets we consider. An unexpected finding of this study is that the variance process governing the U.S. dollar foreign exchange rate market is generating more extreme events than the Bitcoin market. Our results cast doubts on the validity of methodologies currently used in finance research.

Keywords: Education, Finance, Pareto distributions, Power laws, Second moment, Variance

JEL Classification: G12, G14

Suggested Citation

Grobys, Klaus, What Do We Know About the Second Moment of Financial Markets? (May 6, 2021). Available at SSRN: https://ssrn.com/abstract=3856863 or http://dx.doi.org/10.2139/ssrn.3856863

Klaus Grobys (Contact Author)

University of Vaasa ( email )

P.O. Box 700
Wolffintie 34
FIN-65101 Vaasa

University of Jyväskyla ( email )


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