The behaviour of the distributions of stock returns: an analysis of the European market using the Pearson system of continuous probability distributions

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Abstract:

We employ the Pearson system of frequency curves to analyse the behaviour of unconditional daily return distributions for all the shares that constitute the STOXX Europe 600 index. Our results show that over finite time periods of analysis the distributions are adequately described as type IV. The occasional exceptions are linked strictly to extraordinary events that result in abnormal returns. They are more frequent if short time intervals are examined. When an infinite time of analysis is assumed, the results do not reject the hypothesis that the behaviour of stock returns is symmetrical and that it is of type VII, which is a special case of type IV that subsumes the Student's t and the Cauchy distributions and is easier to deal with in practice.

Keywords: European equity market; G11; Pearson system; financial modelling; stock return behaviour; stock return distributions; type IV; type VII

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/09603107.2012.678979

Affiliations: Dipartimento di studi aziendali e giusprivatistici,Università degli studi di Bari, Bari, Italy

Publication date: October 1, 2012

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