Models of asset returns: changes of pattern from high to low event frequency

Juuso Töyli, M Sysi-Aho, K Kaski

    Research output: Contribution to journalArticleScientificpeer-review

    4 Citations (Scopus)

    Abstract

    In this paper we have analysed asset returns of the New York Stock Exchange and the Helsinki Stock Exchange using various time-independent models such as normal, general stable, truncated Levy, mixed diffusion-jump, compound normal, Student t distribution and power exponential distribution and the time-dependent GARCH(1, 1) model with Gaussian and Student t distributed innovations. In order to study changes of pattern at different event horizons, as well as changes of pattern over time for a given event horizon, we have analysed high-frequency or short-horizon intraday returns up from 20 s intervals to a full trading day, medium-frequency or medium-horizon daily returns and low-frequency or long-horizon returns with holding period up to 30 days. As for changes of pattern over time, we found that for medium-frequency returns there are relatively long periods of business-as-usual when the return-generating process is well-described by a normal distribution. We also found periods of ferment, when the volatility grows and complex time dependences tend to emerge, but the known time dependences cannot explain the variability of the distribution. Such changes of pattern are also observed for high-frequency or short-horizon returns, with the exception that the return-generating process never becomes normal. It also turned out that the time dependence of the distribution shape is far more prominent at high frequencies or short horizons than the time dependence of the variance. For long-horizon or low-frequency returns, the distribution is found to converge towards a normal distribution with the time dependences vanishing after a few days.

    Original languageEnglish
    Pages (from-to)373-382
    Number of pages10
    JournalQuantitative Finance
    Volume4
    Issue number3
    DOIs
    Publication statusPublished - Jun 2004
    MoE publication typeA1 Journal article-refereed

    Keywords

    • SYMMETRIC STABLE DISTRIBUTIONS
    • STOCK RETURNS
    • SPECULATIVE PRICES
    • STOCHASTIC-PROCESS
    • MARKET
    • CONVERGENCE
    • BEHAVIOR
    • DYNAMICS
    • VARIANCE

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