The Innovation Distributions

  • Gilles Zumbach
Part of the Springer Finance book series (FINANCE)

Abstract

The distribution of the innovations is the second most important component in a process. With a good understanding of the heteroskedasticity, the distribution of the empirical innovations can be studied. A normal distribution can be clearly rejected, regardless of the model used for the heteroskedasticity. A Student distribution with a number of degrees of freedom around 5 gives a simple and good characterization of the empirical distributions. This shows that the fat tail observed in the return distributions is mostly generated by the innovations, while the volatility feed-back mechanism plays a small role.

Keywords

Return Distribution Innovation Distribution Tail Behavior Volatility Forecast Unconditional Distribution 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

References

  1. 154.
    Zumbach, G.: The riskmetrics 2006 methodology. Technical report, RiskMetrics Group (2006). Available at: www.riskmetrics.com and www.ssrn.com

Copyright information

© Springer-Verlag Berlin Heidelberg 2013

Authors and Affiliations

  • Gilles Zumbach
    • 1
  1. 1.Consulting in Financial ResearchSaconnex d’ArveSwitzerland

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