Compound distributions for financial returns

Emmanuel Afuecheta, Artur Semeyutin, Stephen Chan, Saralees Nadarajah, Diego Andrés Pérez Ruiz

Research output: Contribution to journalArticlepeer-review

Abstract

In this paper, we propose six Student’s t based compound distributions where the scale parameter is randomized using functional forms of the half normal, Fréchet, Lomax, Burr III, inverse gamma and generalized gamma distributions. For each of the proposed distribution, we give expressions for the probability density function, cumulative distribution function, moments and characteristic function. GARCH models with innovations taken to follow the compound distributions are fitted to the data using the method of maximum likelihood. For the sample data considered, we see that all but two of the proposed distributions perform better than two popular distributions. Finally, we perform a simulation study to examine the accuracy of the best performing model.

Original languageEnglish
Article numbere0239652
Number of pages25
JournalPLoS One
Volume15
Issue number10
DOIs
Publication statusPublished - 2 Oct 2020
Externally publishedYes

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