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On the Explaination of Empirical Regularities: The statistical models of stock returns

Author

Listed:
  • Nikitas Pittis

    (University of Piraeus, Greece)

  • Nikolaos Kourogenis

    (Department of Banking and Financial Management, University of Piraeus.)

  • Phoebe Koundouri

    (Dept. of International and European Economic Studies, Athens University of Economics and Business)

Abstract

Statistical models are usually thought of as means for describing statistical regularities. Concerning stock returns, many empirical regularities have been documented in the literature together with their corresponding models. The main task of this paper is to investigate, under the prism of the philosophy of science, the conditions that a statistical model has to satisfy in order to be deemed as explanatory adequate for the existing regularities. We distinguish two alternative sets of criteria for the explanatory adequacy of a statistical model. The fi��rst one is given by the Deductive-Statistical model of explanation, put forward by Hempel (1962). The second set, which contains much stricter conditions than the ��rst, corresponds to the Deductive-Probabilistic-Nomological model suggested by Railton (1978). It is shown that the two most important statistical models of stock returns, namely the multivariate GARCH model and the Factor Model with persistent betas, are D-S explanatory. It is also shown that the Factor Model partially satis��es the D-N-P conditions for explanatory adequacy whereas the GARCH model fails completely in this respect.

Suggested Citation

  • Nikitas Pittis & Nikolaos Kourogenis & Phoebe Koundouri, 2012. "On the Explaination of Empirical Regularities: The statistical models of stock returns," DEOS Working Papers 1220, Athens University of Economics and Business.
  • Handle: RePEc:aue:wpaper:1220
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    More about this item

    Keywords

    empirical regularities; stock returns; single factor model; autoregressive beta;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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