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Scale-free tails in Colombian financial indexes: a primer

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  • Carlos León

Abstract

A maximum likelihood method for estimating the power-law exponent verifies that the positive and negative tails of the Colombian stock market index (IGBC) and the Colombian peso exchange rate (TRM) approximate a scale-free distribution, whereas none of the heavy tails of a local sovereign securities index (IDXTES) are a plausible case for such distribution. Results also (i) support critiques regarding the flaws of ordinary least squares estimation methods for scale-free distributions; (ii) question the validity of Zipf’s law; (iii) suggest that IGBC and TRM display the scale-free nature documented as a stylized fact of financial returns, and that they may be following a gradually truncated Lévy flight; and (v) suggest that local financial markets are self-organized systems.

Suggested Citation

  • Carlos León, 2014. "Scale-free tails in Colombian financial indexes: a primer," BORRADORES DE ECONOMIA 011144, BANCO DE LA REPÚBLICA.
  • Handle: RePEc:col:000094:011144
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    References listed on IDEAS

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    1. Freixas, Xavier & Parigi, Bruno M & Rochet, Jean-Charles, 2000. "Systemic Risk, Interbank Relations, and Liquidity Provision by the Central Bank," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 611-638, August.
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    More about this item

    Keywords

    Scale-free; power-law; Zipf’s law; financial returns.;
    All these keywords.

    JEL classification:

    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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