Modeling Chinese stock returns with stable distribution

Authors:
Weidong Xu;Chongfeng Wu;Yucheng Dong;Weilin Xiao
Affiliations:
School of Management, Zhejiang University, Hangzhou 310058, China;Financial Engineering Research Center, Shanghai Jiaotong University, Shanghai, 200240, China;School of Management, Xi'an Jiaotong University, Shannxi, 710049, China;School of Business Administration, South China University of Technology, Guangzhou, 510640, China
Venue:
Mathematical and Computer Modelling: An International Journal
Year:
2011

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Abstract

In this paper we demonstrate that an @a-stable distribution is better fitted to Chinese stock return data in the Shanghai Composite Index and the Shenzhen Component Index than the classical Black-Scholes model. The sample quantile method developed by McCulloch [J.H. McCulloch, Simple consistent estimators of stable distribution parameters, Communications in Statistics-Simulation and Computation 15 (4) (1986) 1109-1136] is used to estimate the @a-stable distribution for the Shanghai Composite Index and the Shenzhen Component Index. The empirical results show that the asymmetric leptokurtic features presented in the Shanghai Composite Index and Shenzhen Component Index returns can be captured by an @a-stable law.