ABSTRACT
The behavior of prices or returns on financial assets has been investigated since the 1960s, and it has been reported that the distribution is often heavy-tailed and possibly skewed. In particular, modeling of the return distributions has been discussed in many studies. Mandelbrot (1963) and Fama (1965) found that the asset return distribution has heavier tails than a normal distribution and can better be described as a stable Paretian distribution. McDonald (1996) reviewed various specifications of return distribution alternatives fit to empirical data, and Praetz (1972), Madan and Seneta (1990), and Linden
K12089 Chapter: 15 page: 359 date: February 14, 2012
K12089 Chapter: 15 page: 360 date: February 14, 2012
Modeling and
(2001) used a mixture of distributions for modeling the return distributions. Modeling of price or return distributions of financial assets remains an open question. Recently, derivative products dealing with credit risk, which measures the exposure to loss resulting from failure of a company or even a government to fulfill the debt obligation, have been highlighted. As their price fluctuations can be influential on the economy, in spite of being immature markets, fully exploiting insufficient information on them to capture their long-term price trends becomes essential.
