Breaking down the non-normality of daily stock returns

Research output: Contribution to journalArticle

Abstract

This paper investigates whether the non-normality typically observed in daily stock-market returns could arise because of the joint existence of breaks and GARCH effects. It proposes a data-driven procedure to credibly identify the number and timing of breaks and applies it on the benchmark stock-market indices of 27 OECD countries. The findings suggest that a substantial element of the observed deviations from normality might indeed be due to the co-existence of breaks and GARCH effects. However, the presence of structural changes is found to be the primary reason for the non-normality and not the GARCH effects. Also, there is still some remaining excess kurtosis that is unlikely to be linked to the specification of the conditional volatility or the presence of breaks. Finally, an interesting sideline result implies that GARCH models have limited capacity in forecasting stock-market volatility.
Original languageEnglish
Pages (from-to)79-95
Number of pages17
JournalEuropean Journal of Finance
Volume16
Issue number1
Early online date12 May 2009
DOIs
Publication statusPublished - Jan 2010

Keywords

  • stock returns
  • OECD countries
  • non-normality
  • breaks
  • GARCH

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