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The Process of price formation and the skewness of asset returns

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  • Stefan Reimann

Abstract

Distributions of assets returns exhibit a slight skewness. In this note we show that our model of endogenous price formation \cite{Reimann2006} creates an asymmetric return distribution if the price dynamics are a process in which consecutive trading periods are dependent from each other in the sense that opening prices equal closing prices of the former trading period. The corresponding parameter $\alpha$ is estimated from daily prices from 01/01/1999 - 12/31/2004 for 9 large indices. For the S&P 500, the skewness distribution of all its constituting assets is also calculated. The skewness distribution due to our model is compared with the distribution of the empirical skewness values of the ingle assets.

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  • Stefan Reimann, 2006. "The Process of price formation and the skewness of asset returns," Papers physics/0603012, arXiv.org.
    • Handle: RePEc:arx:papers:physics/0603012
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    References listed on IDEAS

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    1. R. Cont, 2001. "Empirical properties of asset returns: stylized facts and statistical issues," Quantitative Finance, Taylor & Francis Journals, vol. 1(2), pages 223-236.
    2. Stefan Reimann, 2006. "An elementary model of price dynamics in a financial market: Distribution, Multiscaling & Entropy," Papers physics/0602097, arXiv.org.
    3. Stefan Reimann, 2006. "An Elementary Model of Price Dynamics in a Financial Market Distribution, Multiscaling & Entropy," IEW - Working Papers 271, Institute for Empirical Research in Economics - University of Zurich.
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