Mixtures of t-distributions for Finance and Forecasting
We explore convenient analytic properties of distributions constructed as mixtures of scaled and shifted t-distributions. A feature that makes this family particularly desirable for econometric applications is that it possesses closed-form expressions for its anti-derivatives (e.g., the cumulative density function). We illustrate the usefulness of these distributions in two applications. In the first application, we use a scaled and shifted t-distribution to produce density forecasts of U.S. inflation and show that these forecasts are more accurate, out-of-sample, than density forecasts obtained using normal or standard t-distributions. In the second application, we replicate the option-pricing exercise of Abadir and Rockinger (2003) using a mixture of scaled and shifted t-distributions and obtain comparably good results, while gaining analytical tractability.
|Date of creation:||Oct 2007|
|Date of revision:|
|Contact details of provider:|| Postal: Josefstädterstr. 39, A-1080 Vienna, Austria|
Phone: ++43 - (0)1 - 599 91 - 0
Fax: ++43 - (0)1 - 599 91 - 555
Web page: http://www.ihs.ac.at
More information through EDIRC
|Order Information:|| Postal: Institute for Advanced Studies - Library, Josefstädterstr. 39, A-1080 Vienna, Austria|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Diebold, Francis X & Gunther, Todd A & Tay, Anthony S, 1998. "Evaluating Density Forecasts with Applications to Financial Risk Management," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 863-83, November.
- Karim Abadir, 1999.
"An introduction to hypergeometric functions for economists,"
Taylor & Francis Journals, vol. 18(3), pages 287-330.
- Abadir, Karim, 1995. "An Introduction to Hypergeometric Functions for Economists," Discussion Papers 9510, Exeter University, Department of Economics.
- Melick, William R. & Thomas, Charles P., 1997. "Recovering an Asset's Implied PDF from Option Prices: An Application to Crude Oil during the Gulf Crisis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(01), pages 91-115, March.
- Abadir, Karim M. & Rockinger, Michael, 2003. "Density Functionals, With An Option-Pricing Application," Econometric Theory, Cambridge University Press, vol. 19(05), pages 778-811, October.
- Yacine Aït-Sahalia & Andrew W. Lo, 1998.
"Nonparametric Estimation of State-Price Densities Implicit in Financial Asset Prices,"
Journal of Finance,
American Finance Association, vol. 53(2), pages 499-547, 04.
- Yacine Ait-Sahalia & Andrew W. Lo, 1995. "Nonparametric Estimation of State-Price Densities Implicit in Financial Asset Prices," NBER Working Papers 5351, National Bureau of Economic Research, Inc.
- Yacine Aït-Sahalia & Andrew W. Lo, . "Nonparametric Estimation of State-Price Densities Implicit in Financial Asset Prices," CRSP working papers 332, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Yi-Ting Chen & Chung-Ming Kuan, 2002. "Time irreversibility and EGARCH effects in US stock index returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(5), pages 565-578.
- Breeden, Douglas T & Litzenberger, Robert H, 1978. "Prices of State-contingent Claims Implicit in Option Prices," The Journal of Business, University of Chicago Press, vol. 51(4), pages 621-51, October.
- Paul H. Kupiec, 1995. "Techniques for verifying the accuracy of risk measurement models," Finance and Economics Discussion Series 95-24, Board of Governors of the Federal Reserve System (U.S.).
When requesting a correction, please mention this item's handle: RePEc:ihs:ihsesp:216. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Doris Szoncsitz)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.