Infinite-Variance Error Structure in Finance and Economics

Year 2018, , 14 - 23, 16.04.2018

Fatma Özgü Serttaş

https://doi.org/10.33818/ier.306676

Abstract

Many macroeconomic and
financial data exhibit large outliers and high volatility so that their returns
are usually modeled to follow an infinite-variance stable process. Extreme
behaviors in such data tend to exist especially for emerging markets due to
frequent existence of high economic turmoil. A relatively new area of research studies
that model the financial returns as infinite-variance stable errors exists for
emerging markets as well as for industrialized countries. This study aims to
briefly introduce the reader the concept of infinite-variance stable
distributions, discuss some existing studies on unit root and co-integration
tests that assume infinite-variance stable error structure, and then to point
out the potential lines of research while showing the significance of this relatively
new concept.

Keywords

Infinite-variance errors, Stable distributions, Financial returns, Unit root tests

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