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The Innovation Distributions

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Listed:
  • Gilles Zumbach

    (Consulting in Financial Research)

Abstract

The distribution of the innovations is the second most important component in a process. With a good understanding of the heteroskedasticity, the distribution of the empirical innovations can be studied. A normal distribution can be clearly rejected, regardless of the model used for the heteroskedasticity. A Student distribution with a number of degrees of freedom around 5 gives a simple and good characterization of the empirical distributions. This shows that the fat tail observed in the return distributions is mostly generated by the innovations, while the volatility feed-back mechanism plays a small role.

Suggested Citation

Handle: RePEc:spr:sprfcp:978-3-642-31742-2_13
DOI: 10.1007/978-3-642-31742-2_13
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