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Letter to the Editor—The Distribution of Stock Price Differences: Gaussian After All?

Author

Listed:
  • Josef Brada

    (University of Minnesota)

  • Harry Ernst

    (Tufts University)

  • John Van Tassel

    (Boston College)

Abstract

In this paper the distribution of stock price differences is studied. Starting from Bachelier's hypothesis regarding the independence of stock price changes a model based on price differences taken across transactions, rather than differences obtained across time periods, is investigated. Using this model the distributions of price changes for a sample of 10 stocks were studied. In contrast to the fat tailed, excessively peaked distributions obtained by differencing across time periods, the distributions obtained by differencing across transactions did not have an excessive number of extreme events, although the center classes continued to be overcrowded. As the number of transactions over which the price differences were taken increased from 1 to n where n is equal to the largest number of transactions over which the price has remained unchanged, the distribution of the Δ P 's approached the normal distribution. Thus we conclude that stock price changes are not independent across single transactions, and that stock prices should be differenced across blocks of transactions, rather than time intervals.

Suggested Citation

  • Josef Brada & Harry Ernst & John Van Tassel, 1966. "Letter to the Editor—The Distribution of Stock Price Differences: Gaussian After All?," Operations Research, INFORMS, vol. 14(2), pages 334-340, April.
    • Handle: RePEc:inm:oropre:v:14:y:1966:i:2:p:334-340
    DOI: 10.1287/opre.14.2.334
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    Cited by:

    1. Maximilian Beikirch & Simon Cramer & Martin Frank & Philipp Otte & Emma Pabich & Torsten Trimborn, 2018. "Simulation of Stylized Facts in Agent-Based Computational Economic Market Models," Papers 1812.02726, arXiv.org, revised Nov 2019.
    2. Simon Cramer & Torsten Trimborn, 2019. "Stylized Facts and Agent-Based Modeling," Papers 1912.02684, arXiv.org.
    3. Aldrich, Eric M. & Lee, Seung, 2018. "Relative spread and price discovery," Journal of Empirical Finance, Elsevier, vol. 48(C), pages 81-98.
    4. Jaramillo-López, Oscar Andrés & Forero-Laverde, Germán & Venegas-Martínez, Francisco, 2020. "Evolución del supuesto de normalidad en finanzas: un análisis epistemológico del tipo Popper-Kuhn ¿Por qué la normalidad no cae en desuso? [Evolution of the assumption of normality in finance: a ep," MPRA Paper 101938, University Library of Munich, Germany.
    5. Jovanovic, Franck & Schinckus, Christophe, 2017. "Econophysics and Financial Economics: An Emerging Dialogue," OUP Catalogue, Oxford University Press, number 9780190205034, Decembrie.

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