ABSTRACT

When modeling asset returns according to the assumption of Normality, the magnitude of price changes may not be known a priori. In most practical applications, the solution to this problem is to assume price changes are standard Normally distributed. Standard Normal distributions specifi cally have zero mean and unit variance. A well-known feature of these processes is that approximately 95% of all the price changes are observed to be within ±2 standard deviations of the mean change in price.