Levy-stable Distributions Revisited: Tail Index > 2 Does Not Exclude the Levy-stable Regime
Year: 2001
Type: article
Abstract: Power-law tail behavior and the summation scheme of Levy-stable distributions is the basis for their frequent use as models when fat tails above a Gaussian distribution are observed. However, recent studies suggest that financial asset returns exhibit tail exponents well above the Levy-stable regime (0 < α ≤ 2). In this paper, we illustrate that widely used tail index estimates (log–log linear regression and Hill) can give exponents well above the asymptotic limit for α close to 2, resulting in overestimation of the tail exponent in finite samples. The reported value of the tail exponent α around 3 may very well indicate a Levy-stable distribution with α ≈ 1.8.
Author: RAFAŁ WERON
Institution: Wrocław University of Science and Technology
Language: English
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2950196866