Financial Market Risk

3 Stable scaling distributions in finance

 

 

 

 

3.1 Introduction

As we discussed in Chapter 1, the distributional form of financial asset returns has important implications for theoretical and empirical analyses in economics and finance. For example, asset, portfolio and option pricing theories are typically based on the shape of these distributions, which some researchers have tried to recover from financial market prices, as, for example, recently Jackwerth and Rubinstein (1996) and Melick and Thomas (1997) did for the options markets.

In particular, stable distributions are currently en vogue again for risk valuation, asset and option pricing and portfolio management, long after having been in fashion for a short-lived period in the 1960s. ...