Chapter

Extreme Values in Financial Economics

Franck Jovanovic and Christophe Schinckus

in Econophysics and Financial Economics

Published in print January 2017 | ISBN: 9780190205034
Published online December 2016 | e-ISBN: 9780190205065 | DOI: https://dx.doi.org/10.1093/acprof:oso/9780190205034.003.0002
Extreme Values in Financial Economics

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Chapter 2 deals with the first empirical counterfacts observed in financial data: the statistical description of returns does not fit with a Gaussian distribution. Of course, financial economists have never ignored extreme variations. On the contrary, the possibility of modeling extreme variations has been sought since the creation of financial economics in the early 1960s. This chapter details the first attempts by Mandelbrot, Fama, and Samuelson to use Pareto-Lvy (stable Lvy) distributions to capture the occurrence of extreme values. The chapter also clarifies why, although the emergence of econophysicists echoes Mandelbrot’s approach, it is differs from his work on many points. This chapter reviews the technical and conceptual reasons explaining the progressive loss of interest in stable Lvy distributions in the 1970s. The chapter concludes with the alternative paths explored by financial economists to characterize the occurrence of extreme values (the major ones being jump processes and ARCH-type models).

Keywords: extreme variation; Benoit Mandelbrot; Gaussian framework; jump/diffusion process; ARCH-type model

Chapter.  10016 words.  Illustrated.

Subjects: Financial Markets

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