Daily cash price changes are not normally distributed. Their empirical distributions have fat tails and most are skewed. In addition, they are not independent. Among the diffusion-jump, extended generalized autoregressive conditional heteroskedasticity (GARCH), and deterministic chaos processes, a GARCH process with residuals following a student distribution is the most likely. Our GARCH model reduces leptokurtosis, removes nonlinear dependence, and provides a considerable improvement over the i.i.d. normal model. The GARCH process is not well calibrated because it cannot explain all the observed nonnormality, but it does yield asymptotically valid hypothesis tests.
- Conditional heteroskedasticity
- Deterministic chaos
- Market anomalies
ASJC Scopus subject areas
- Agricultural and Biological Sciences (miscellaneous)
- Economics and Econometrics