A classic problem in physics is the origin of fat-tailed distributions generated by complex systems. We study the distributions of stock returns measured over different time lags tau. We find that destroying all correlations without changing the tau = 1 d distribution, by shuffling the order of the daily returns, causes the fat tails to almost vanish for tau > 1 d. We argue that the fat tails are caused by the well-known long-range volatility correlations that have already been systematically studied previously. Indeed, destroying only sign correlations, by shuffling the order of only the signs (but not the absolute values) of the daily returns, allows the fat tails to persist for tau > 1 d. (C) 2003 Elsevier B.V. All rights reserved.
The origin of fat-tailed distributions in financial time series
SERVA, Maurizio
2003-01-01
Abstract
A classic problem in physics is the origin of fat-tailed distributions generated by complex systems. We study the distributions of stock returns measured over different time lags tau. We find that destroying all correlations without changing the tau = 1 d distribution, by shuffling the order of the daily returns, causes the fat tails to almost vanish for tau > 1 d. We argue that the fat tails are caused by the well-known long-range volatility correlations that have already been systematically studied previously. Indeed, destroying only sign correlations, by shuffling the order of only the signs (but not the absolute values) of the daily returns, allows the fat tails to persist for tau > 1 d. (C) 2003 Elsevier B.V. All rights reserved.Pubblicazioni consigliate
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