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The distribution of stock market returns and the market model

  • Hans Dillen

    (Economics Department, Sveriges Riksbank, Sweden)

  • Bo Stoltz

    (Ministry of Finance, Sweden)

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    In this paper the Market Model, estimated for 20 stocks on the Stockholm Stock Exchange, is examined under different assumptions regarding the distribution of the residuals. We find strong evidence that the residuals have a leptokurtic distribution and our results suggest that much of the leptokurticness can be attributed to a jump component in the distribution. Moreover, changes in the assumed distribution of the residuals can sometimes change the beta estimate by 20 percent or more. Our alternative estimators are more robust to extreme observations.

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    Article provided by Finnish Economic Association in its journal Finnish Economic Papers.

    Volume (Year): 12 (1999)
    Issue (Month): 1 (Spring)
    Pages: 41-56

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    Handle: RePEc:fep:journl:v:12:y:1999:i:1:p:41-56
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    1. Hawawini, Gabriel, 1983. "Why beta shifts as the return interval changes," MPRA Paper 44893, University Library of Munich, Germany.
    2. Berglund, Tom & Liljeblom, Eva, 1990. "The Impact of Trading Volume on Stock Return Distributions: An Empirical Analysis," Discussion Papers 315, The Research Institute of the Finnish Economy.
    3. Hentschel, Ludger & Campbell, John, 1992. "No News is Good News: An Asymmetric Model of Changing Volatility in Stock Returns," Scholarly Articles 3220232, Harvard University Department of Economics.
    4. Elroy Dimson and Paul Marsh., 1981. "The Stability of UK Risk Measures and the Problem of Thin Trading," Research Program in Finance Working Papers 120, University of California at Berkeley.
    5. Lau, Amy Hing-Ling & Lau, Hon-Shiang & Wingender, John R, 1990. "The Distribution of Stock Returns: New Evidence against the Stable Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 217-23, April.
    6. Clark, Peter K, 1973. "A Subordinated Stochastic Process Model with Finite Variance for Speculative Prices," Econometrica, Econometric Society, vol. 41(1), pages 135-55, January.
    7. Cartwright, Phillip A & Lee, Cheng F, 1987. "Time Aggregation and the Estimation of the Market Model: Empirical Evidence," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(1), pages 131-43, January.
    8. Chan, Louis K. C. & Lakonishok, Josef, 1992. "Robust Measurement of Beta Risk," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(02), pages 265-282, June.
    9. Beckers, Stan, 1981. "A Note on Estimating the Parameters of the Diffusion-Jump Model of Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(01), pages 127-140, March.
    10. Hsu, D. A., 1984. "The Behavior of Stock Returns: Is It Stationary or Evolutionary?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(01), pages 11-28, March.
    11. Tom Berglund & Eva Liljeblom, 1990. "The impact of trading volume on stock return distributions : an empirical analysis," Finnish Economic Papers, Finnish Economic Association, vol. 3(2), pages 108-124, Autumn.
    12. Bookstaber, Richard M & McDonald, James B, 1987. "A General Distribution for Describing Security Price Returns," The Journal of Business, University of Chicago Press, vol. 60(3), pages 401-24, July.
    13. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    14. Zeckhauser, Richard & Thompson, Mark, 1970. "Linear Regression with Non-Normal Error Terms," The Review of Economics and Statistics, MIT Press, vol. 52(3), pages 280-86, August.
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