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Models for stock returns

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  • Saralees Nadarajah

Abstract

Historically, the normal variance model has been used to describe stock return distributions. This model is based on taking the conditional stock return distribution to be normal with its variance itself being a random variable. The form of the actual stock return distribution will depend on the distribution for the variance. In practice, the distributions chosen for the variance appear to be very limited. In this note, we derive a comprehensive collection of formulas for the actual stock return distribution, covering some sixteen flexible families. The corresponding estimation procedures are derived by the method of moments and the method of maximum likelihood. We feel that this work could serve as a useful reference and lead to improved modelling with respect to stock market returns.

Suggested Citation

  • Saralees Nadarajah, 2012. "Models for stock returns," Quantitative Finance, Taylor & Francis Journals, vol. 12(3), pages 411-424, February.
  • Handle: RePEc:taf:quantf:v:12:y:2012:i:3:p:411-424
    DOI: 10.1080/14697680902855384
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    File URL: http://hdl.handle.net/10.1080/14697680902855384
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    Cited by:

    1. Daniel Martin Katz & Michael J Bommarito II & Tyler Soellinger & James Ming Chen, 2015. "Law on the Market? Abnormal Stock Returns and Supreme Court Decision-Making," Papers 1508.05751, arXiv.org, revised May 2017.

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