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The structure of financial returns

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  • Madan, Dilip B.
  • Wang, King

Abstract

Financial returns at unit time are modeled as non-Gaussian limit laws. They may reflect random walks or additive processes reflecting some predictability. Mixtures of these two constructions are formulated and estimated on one minute data. It is observed that the random walk fraction is generally below 10%. The results argue against a strict random walk in favor of the presence of a predictable component representing returns as perpetual motion machines responding to the larger past price movements.

Suggested Citation

  • Madan, Dilip B. & Wang, King, 2021. "The structure of financial returns," Finance Research Letters, Elsevier, vol. 40(C).
    • Handle: RePEc:eee:finlet:v:40:y:2021:i:c:s1544612320300799
    DOI: 10.1016/j.frl.2020.101665
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    References listed on IDEAS

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    1. Peter Carr & Hélyette Geman & Dilip Madan & Marc Yor, 2005. "Pricing options on realized variance," Finance and Stochastics, Springer, vol. 9(4), pages 453-475, October.
    2. Madan, Dilip B. & Wang, King, 2016. "Nonrandom price movements," Finance Research Letters, Elsevier, vol. 17(C), pages 103-109.
    3. Dilip B. Madan & Wim Schoutens, 2020. "Self‐similarity in long‐horizon returns," Mathematical Finance, Wiley Blackwell, vol. 30(4), pages 1368-1391, October.
    4. Ole E. Barndorff‐Nielsen & Neil Shephard, 2001. "Non‐Gaussian Ornstein–Uhlenbeck‐based models and some of their uses in financial economics," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 63(2), pages 167-241.
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    Cited by:

    1. Linyu Cao & Ruili Sun & Tiefeng Ma & Conan Liu, 2023. "On Asymmetric Correlations and Their Applications in Financial Markets," JRFM, MDPI, vol. 16(3), pages 1-18, March.

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    More about this item

    Keywords

    Bilateral gamma; CGMY; Sato process; Random walk;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G19 - Financial Economics - - General Financial Markets - - - Other

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