Fat Tails

[mswiggs]

Hey all,
simple question, just wondering if fat tails for stocks(excluding stocks with upcoming 'big' announcements, e.g medical approvals,etc like low cap biotechs) occur more to the downside or to the upside, intuitively i am thinking downside, but perhaps someone has done some analysis to confirm this?

Cheers Mick

 

[mit]

Mick,

Depends on how far ahead you are looking. Longer term most stocks tend to go up in price the the tail tends to be fatter on the upside. On the downside you have a limit of 0 for a stock which tends to distort the probability curve. However, given that it is difficult to trail a short position I would say that it would not be a fat tail.

I would think shorter term as their is more noise the distribution would be closer to a normal curve and so have no fat tails.

Did I understand you question okay?

MIT

 

[mswiggs]

yea thanks mit, probably im more focused on events that occur, like stock movements of 3+ sigmas in one day. Over time stocks go up, which means that the curve looks more fat to the upside. I should have made the quesion more precise. So im interested in stock movements that occur 3+ sigmas on the daily timeframe, and do they occur more to the upside or to the downside.

The reason i say it occurs to the downside is you hear more about crashes than a rocket. And although over time markets generally go up the movements dont tend to occur outside 3 sigmas (perhaps this is a wrong assumption) .

Cheers Mick