Hot answers tagged theory
4
Some of the used heavy-tail distributions are:
Log-Cauchy and Log-Gamma
Lévy
Burr and Weibull
Mixed normal
Here two papers that cover some of them and others:
http://ect-pigorsch.mee.uni-bonn.de/data/research/papers/Financial_Economics,_Fat-tailed_Distributions.pdf
http://www.rff.org/RFF/Documents/RFF-DP-11-19-REV.pdf
3
This is the equity premium puzzle. (See that article for references.)
My thoughts are that individual investors are rational to be risk-averse and demand a premium for bearing a type of market risk that cannot be diversified away. This risk is actually worse and more insidious than it appears, because "personal" circumstances tend to correlate in ...
1
If you have the mathematical sophistication, you should review the original papers referenced on the Equity Premium Puzzle page, particularly Mehra and Prescott (1985). Note, however, that contrary to other opinions on this page, the puzzle is NOT that there is an equity risk premium. On the contrary, the puzzle is that the premium had been so high, at ...
1
Another observation that the connection between return and risk is not that straightforward (and in contradiction to modern portfolio theory!) is the low-volatility anomaly.
It turns out empirically that stocks that have low-volatility or low-beta show higher returns than high-volatility or high-beta stocks.
See also this question and answers:
Why does ...
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