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The Joint Distribution of Stock Returns is Not Elliptical
Year Of Publication: 2010
Month Of Publication: September
Pages: 18
Download Count: 5
View Count: 1388
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 11-30-2010
Publisher: Administrator
Using a large set of daily US and Japanese stock returns, we test in detail the relevance of Student models, and of more general elliptical models, for describing the joint distribution of returns. We find that while Student copulas provide a good approximation for strongly correlated pairs of stocks, systematic discrepancies appear as the linear correlation between stocks decreases, that rule out all elliptical models. Intuitively, the failure of elliptical models can be traced to the inadequacy of the assumption of a single volatility mode for all stocks. We suggest several ideas of methodological interest to efficiently visualise and compare different copulas. We identify the rescaled difference with the Gaussian copula and the central value of the copula as strongly discriminating observables. We insist on the need to shun away from formal choices of copulas with no financial interpretation.
Bouchaud, Jean-Philippe Sign in to follow this author
Chicheportiche, Rémy Sign in to follow this author
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