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Extremes

, Volume 17, Issue 4, pp 557–583 | Cite as

The dynamic power law model

  • Bryan KellyEmail author
Article

Abstract

I propose a new measure of common, time-varying tail risk for large cross sections of stock returns. Stock return tails are described by a power law in which the power law exponent is allowed to transition smoothly through time as a function of recent data. It is motivated by asset pricing theory and is estimable via quasi-maximum likelihood. Estimates indicate substantial time variation in stock return tails, and that the risk of extreme returns rises in weak economic conditions.

Keywords

Power law Finance Asset prices Crash Tail risk 

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Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.University of ChicagoChicagoUSA

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