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Can Statistical Models of Stock Returns "Explain" Empirical Regularities?

Author

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  • Koundouri, Phoebe
  • Kourogenis, Nikolaos
  • Pittis, Nikitas

Abstract

Statistical models are usually thought of as means for describing statistical regularities. Concerning stock returns, many empirical regularities have been documented in the literature together with their corresponding models. The main task of this paper is to investigate, under the prism of the philosophy of science, the conditions that a statistical model has to satisfy in order to be deemed as explanatory adequate for the existing regularities. We distinguish two alternative sets of criteria for the explanatory adequacy of a statistical model. The first one is given by the Deductive-Statistical model of explanation, put forward by Hempel (1962). The second set, which contains much stricter conditions than the first, corresponds to the Deductive-Probabilistic-Nomological model suggested by Railton (1978). It is shown that the two most important statistical models of stock returns, namely the multivariate GARCH model and the Factor Model with persistent betas, are D-S explanatory. It is also shown that the Factor Model partially satisfies the D-N-P conditions for explanatory adequacy whereas the GARCH model fails completely in this respect.

Suggested Citation

  • Koundouri, Phoebe & Kourogenis, Nikolaos & Pittis, Nikitas, 2012. "Can Statistical Models of Stock Returns "Explain" Empirical Regularities?," MPRA Paper 122492, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:122492
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    File URL: https://mpra.ub.uni-muenchen.de/122492/1/MPRA_paper_122492.pdf
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    Cited by:

    1. Koundouri, Phoebe & Kourogenis, Nikolaos & Pittis, Nikitas, 2012. "Statistical Modeling of Stock Returns: A Historical Survey with Some Methodological Reflections," MPRA Paper 122422, University Library of Munich, Germany.

    More about this item

    Keywords

    empirical regularities; stock returns; single factor model; autoregressive beta; statistical explanation;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • Y1 - Miscellaneous Categories - - Data: Tables and Charts

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