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Are asset return tail estimations related to volatility long-range correlations?

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  • Bacry, Emmanuel
  • Kozhemyak, Alexey
  • Muzy, Jean-François

Abstract

We discuss a possible scenario explaining in what respect the observed fat tails of asset returns or volatility fluctuations can be related to volatility long-range correlations. Our approach is based on recently introduced multifractal models for asset returns that account for the volatility correlations through a multiplicative random cascade. Within the framework of these models, it can be shown that the sample size required for a correct estimation of the behavior of extreme return fluctuations is generally huge and outside the range of accessible size of data. Consequently, in many cases, the extreme tail probability appears as a power-law, with a rather small (underestimated) tail exponent. We point out that increasing the amount of data by using smaller and smaller (intraday) scales, does not contribute to reduce the bias and, as observed empirically, the tail exponent turns out to be rather stable across scales.

Suggested Citation

  • Bacry, Emmanuel & Kozhemyak, Alexey & Muzy, Jean-François, 2006. "Are asset return tail estimations related to volatility long-range correlations?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 370(1), pages 119-126.
  • Handle: RePEc:eee:phsmap:v:370:y:2006:i:1:p:119-126
    DOI: 10.1016/j.physa.2006.04.022
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    References listed on IDEAS

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    1. J. Doyne Farmer & Fabrizio Lillo, 2003. "On the origin of power law tails in price fluctuations," Papers cond-mat/0309416, arXiv.org, revised Jan 2004.
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    Cited by:

    1. P. Peirano & D. Challet, 2012. "Baldovin-Stella stochastic volatility process and Wiener process mixtures," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 85(8), pages 1-12, August.
    2. Yang, Honglin & Wan, Hong & Zha, Yong, 2013. "Autocorrelation type, timescale and statistical property in financial time series," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(7), pages 1681-1693.
    3. Challet, Damien & Peirano, Pier Paolo, 2008. "The ups and downs of the renormalization group applied to financial time series," MPRA Paper 9770, University Library of Munich, Germany.

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