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A Model for Stock Returns and Volatility

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  • Tao Ma
  • R. A. Serota
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    Abstract

    We prove that Student's t-distribution provides one of the better fits to returns of S&P component stocks and the generalized inverse gamma distribution best fits VIX and VXO volatility data. We further argue that a more accurate measure of the volatility may be possible based on the fact that stock returns can be understood as the product distribution of the volatility and normal distributions. We find Brown noise in VIX and VXO time series and explain the mean and the variance of the relaxation times on approach to the steady-state distribution.

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    File URL: http://arxiv.org/pdf/1305.4173
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1305.4173.

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    Date of creation: May 2013
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    Handle: RePEc:arx:papers:1305.4173

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    Web page: http://arxiv.org/

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