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Beyond the conditional mean: The impact of trading intensity on the full distribution of extreme returns

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  • Luo, Yun

Abstract

This study examines the link between extreme returns and trading intensity in financial markets using a parametric model based on extreme value theory (EVT). We employ a Fréchet distribution to dynamically relate the scale parameter and tail index to trading intensity and volatility. We apply the model to the maximum and minimum returns at 5 min frequency for six stocks across three sectors. The model fits the distributions of extreme returns well. We find that trading intensity significantly affects the scale parameter of maximum returns, though its impact on minimum returns varies by stock. Volatility primarily drives the tail index, while the connection between trading intensity and the tail index is less clear. Additionally, extreme returns respond differently to trading intensity at the mean compared to the tails.

Suggested Citation

  • Luo, Yun, 2025. "Beyond the conditional mean: The impact of trading intensity on the full distribution of extreme returns," Economics Letters, Elsevier, vol. 255(C).
    • Handle: RePEc:eee:ecolet:v:255:y:2025:i:c:s0165176525003349
    DOI: 10.1016/j.econlet.2025.112497
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    References listed on IDEAS

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    1. Parkinson, Michael, 1980. "The Extreme Value Method for Estimating the Variance of the Rate of Return," The Journal of Business, University of Chicago Press, vol. 53(1), pages 61-65, January.
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    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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