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A conditional distribution model for limited stock index returns

Author

Listed:
  • Walter G. Sanddorf-Koehle
  • Ralph Friedmann

Abstract

When a price limit regime exists for all of the stocks involved in an index, the index return is an aggregate of limited variables and thereby it is restricted to the same limits. We argue that neither a censored nor a truncated distribution model is appropriate for the aggregate return. The proposed mixed beta distribution allows for varying conditional mean and volatility, and with increasing volatility it changes from leptokurtic to platykurtic densities. The model is illustrated and statistically evaluated with an empirical application to the Shanghai stock market index returns under a 10 % price change limit regime.

Suggested Citation

  • Walter G. Sanddorf-Koehle & Ralph Friedmann, 2004. "A conditional distribution model for limited stock index returns," Econometric Society 2004 Far Eastern Meetings 437, Econometric Society.
  • Handle: RePEc:ecm:feam04:437
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    More about this item

    Keywords

    Price limits; Mixed distributions; Beta distribution; GARCH;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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